Lessons from Bad Debts
It is important to implement good process and procedures early on in business to reduce headaches down the track. By taking a few additional steps when initially engaging with customers and making your customers aware of the potential consequences of non-payment, the chances of default are likely to reduce.
When setting up a new debtor through a credit application form, ensure the responsibility for payment is assigned to an individual, as well as the entity for which the account is set up. Do this by wording the initial credit arrangement carefully, including director guarantees and provisions that individuals will be responsible for all outstanding accounts for entities in their group.
Furthermore, agree the terms of trading with the customer in the application, and detail what your actions may include with respect to the Personal Property Securities Act.
Maximise your avenues for collection by incorporating certain provisions into your application. Examples are retention of title clauses which detail the obligations of the customer until payment has been made in full, that penalty interest accrues on overdue accounts, and that there is no right of set-off of claims against invoicing owing.
Delivery and invoicing
Ensure the invoice is provided on delivery, addressed to the individual in his or her capacity as director/owner of the entity, and where possible, issue interim invoices in order to improve cash flow where goods or services are delivered on a progressive basis.
If dealing with a large organisation or government department spend the time to understand their invoice payment approval procedures and align your process to this.
Assign responsibility for credit control and collections to one person, and measure their performance based on collections and debtors ageing on a monthly basis. Where possible this role should be separate from sales and customer support.
Set a consistent tone, after the initial invoice follow up by one statement and then a phone call to ascertain the reason why the account is unpaid and follow up by obtaining a promise for payment.
Warning signs such as bounced or post dated cheques, and difficulty dealing with the customer’s accounts department should not be ignored.
Set a time limit to refer the debtor to an external collection agency, such as 90 days, and use agencies which operate on a no recovery – no charge basis.
By clearly establishing and assigning accountability during the initial set-up, you maximise your chances of recovery should legal action be required.
ESV can help analyse debtors and review your debtors’ control system in order to identify vulnerabilities in cash flow management. Should you have any questions in relation to debt collection, or cash flow management in general, please contact your ESV Engagement Partner on 9283 1666.