Tips for reducing Bad Debt

Today Devine Accounting staff and clients attended one of the fantastic free business workshops with ANZ National Bank titled "How to manage your cashflow better."

One of the best things we took away ourselves was tips for reducing bad debt. Even a profitable business can struggle or fail due to cashflow problems and managing debt is a big issue for cashflow in many small businesses. Most business will experience bad debt. 

We all send out invoices and expect to get paid - but what happens when your customers don't pay?
Or don't pay in a timely manner? We all have bills to pay ourselves and if we don't get paid we sometimes have to cover our clients debt - or do we?

A customer who doesn't pay on time is basically getting an interest free loan. It is a loan because they owe money to you but it stays in their bank account - and until it is in your bank account, you cannot spend it yourself.

Tips for Reducing Bad Debt

  1. Establish Terms of Trade between your business and your customer. How to draft terms of trade. Check with your lawyer or accountant before using one not customised to your business.
  2. Obtain supplier references. Ask your customer for details of other suppliers that they have done business with recently. If they are reluctant to provide details, it may be a bad sign.
  3. Obtain a credit check to reduce the risk of a bad debt. It is worthwhile getting a check on the directors as well as the company and business owners are likely to default before the company.
  4. Search the Personal Property Securities Register (PPSR). The PPSR is where security interests over personal property may be registered and can be searched. Searching a debtor can determine whether they have any existing security interests as this may mean they have a number of existing debts.
  5. Send invoices out immediately, don't wait until the end of the week or month. The sooner you send it, the sooner you will be paid. Also if you send it late the client may have forgotten the "value" of your product or service.
  6. Email invoices and add a read receipt, so that you have confirmation that they have received it. It will arrive with your customer immediately and you won't have to spend money on postage.
  7. Encourage your customers to pay via internet banking. Ensure you include your bank details on the invoice. This saves your customer having to write and post a cheque and saves you a trip to the bank to deposit it - so will get into your account sooner.

  8. Offer customers the option of paying you by credit card. This provides the customer with payment flexibility and may give you a point of difference over your competitors.
  9. Keep track of unpaid invoices using your Accounting software's accounts receivable reconciliation ledger. We and our clients use Xero online accounting.
  10. Follow up unpaid invoices. They say it's the squeaky wheel that gets the oil. Some people will leave it as long as they can to make the payment and some people do just forget. This may involve a phone call to remind them and getting a commitment as to when the invoice will be paid. If the debt remains unpaid, you may need to visit the customer.

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