Last blog post was about being prepared for the worst – in terms of estate planning for yourself and your family. This post, we wanted to address protection and preparedness from a business perspective – in other words – how to ensure your invoices get paid – preferably in a timely manner.
You might think, especially if you’re just starting out, that you do the work, issue the invoice and voila, you get paid. Sure, it’s supposed to work like that, but sadly, for all too many Australian business owners, it doesn’t. And worse, the lack of cash flow that results from slow or non-payment can send businesses to the wall.
Recently we read of a two-year old small consulting firm that had to write off $100,000 in unpaid invoices last year. Two of their clients went into liquidation owing $20K and $75K. Needless to say, that’s a lot of money to write-off and work to have done without getting paid.
And it’s not just customers that go into liquidation that cause invoicing cash flow issues. A similar outcome can result from having clients argue the work wasn’t done to their specifications. Or having your invoices being paid late (think: 60, 90, 120 or 180 days – which is the ‘norm’ for some suppliers) can also push your cash flow to the max. Did you know that Xero’s own research shows that a 7 day invoice is, on average, paid 10 days late.
So how do you avoid losing out on having your invoices paid in a timely manner? Here are five tips that you might consider. And the earlier in the year you implement these, the less likely you are to get burned.
Do a customer credit check before you start working with someone new
Make sure you do your due diligence prior to beginning work with a new customer. Ask for some of their suppliers’ details and actually ring them to check the company is legitimate and pays its bills on time. But also, ask what they’re like to work with. The last thing you want to do is take on a customer that’s just plain difficult to manage (hint: your sanity is just as important as your cash flow). If you want to be extra careful (or alarm bells are sounding) you can also check ASIC and purchase a company information extract for around $20. Depending on what you’re after, these extracts can give you an idea of director changes, changes of company names, addresses, share structures, etc. If directors, addresses or names change regularly, or one of the directors had previously been banned from directorship, that’s a good indication that things might not be as they seem.
Create a set of terms and conditions – and get the customer to sign off on them before you begin.
You tick the T&Cs box almost every time you do business online, so why do so very few small businesses have these? A good set of terms and conditions can be a godsend when/if you ever have to enforce them to get paid. Essentially your T&Cs set out how you and your customer will work together, what’s expected of both of you, the terms of payment, terms of enforceability and how to work through a disagreement. Sure you can draft these yourself, in fact you absolutely should think about how your business needs to work and prepare the first draft, but have the final document drawn up by a solicitor to ensure that should you need to enforce it, it’s worth it’s weight in gold (aka good hard cash).
Think about your payment terms (and theirs)
Whilst you might think it’s the standard to give people 30 days to pay, according to accounting program Xero, 75% of invoices give 2 weeks or less. And these days, 7 days is becoming more common. Another thing that you can think about doing, especially if there’s a heavy investment of time or materials early in the piece, is require a payment up front, with milestone payments along the way. Plus always check what your customers’ payment cycles are. Some customers will tell you that it’s 30 days after invoice or 30 days after the Xth of the month. Then it’s up to you to make sure that a: you’re comfortable with those terms or you’re prepared to negotiate earlier payment that’s then put in writing and b: you have a process in place to ensure your invoice is received in advance of the Xth of the month.
Track your outstanding invoices
Trying to keep track of everything in your head or on an old-fashioned spreadsheet/word doc is a recipe for disaster. Plus then you’re relying on knowing which customer owes which invoice, for how much, etc. I don’t know about you, but my brain is already doing enough. Having a reliable accounting system, preferably one that tracks invoices going out and paid – in real time like Xero – means it’s one less thing for you to think about. Plus many cloud accounting programs have the ability for you to set up several automatic reminders on invoices that are overdue – that’s several less emails to send/phone calls you have to make. Oh and it makes reconciliations and BAS so much easier to boot. Another small thing that real time tracking also does, is give you an idea of how long people take to pay. Anyone can be a bit forgetful or have a month where they’re juggling cash flow, but if you’ve a customer or two who routinely pay significantly late or their payment times are getting longer and longer, that might be an alarm that something else is going on and it’s time to check in. If they’re just using you as a credit facility, you might offer them a discount to pay on time. Or you might have to start enforcing the missed payment interest charges as outlined on your terms and conditions. Or if it’s been going on for a long while, maybe it’s time to have a heart to heart with them and suggest stopping work. That’s a tough call, but better that than being tens of thousands of dollars out of pocket when the customer calls time and having to bring in the legal guns.
Talk to your accountant
If any of this is ringing alarm bells for your business, the best thing you can do is talk to a professional accountant. They can look back through your accounts and do a bit of a customer audit and spot any issues. They can also make suggestions on how to best manage your cash flow moving forward. Or they can help you set up a cloud accounting program to better manage your business invoices and payments so you’re better across your own numbers.
And that’s where we can help. If you want to better manage your cash flow, or set up a cloud accounting program like Xero, we’d be delighted to talk further. You can call us on 6023 1700 or drop us a note via the form below.
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If you've got financial or business questions, or you just want to run something by us, we'd be delighted to really talk to you – in person, over the phone - call us on 02 6023 1700 - or you can use the form below and we'll get back to you.
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