Small businesses rely on a healthy flow of income to remain in business.
For small businesses, a bad debt can mean the difference between profitability and liquidation. For a small business, collecting debts can be a difficult and, occasionally, litigious process. There are a number of things you can do to increase your chances of being paid. Read on to find out how to avoid bad debts, manage overdue payments and collect debts.
Avoiding Bad Debts
Develop a payment policy
Before you provide any services or goods, contract with your customer so they understand what they are responsible for paying and when.
Ensure to capture relevant content that communicates clearly your expectations. Furthermore, ensure that the content of your contract / quotation is in line with the legislation of New Zealand.
Payment terms need to be agreed on by both parties. Consider adopting a late payment fee to encourage on-time payments. Make sure all late fee policies are included in your Terms of Trade documentation.
You may prefer to ask for an upfront payment / deposit. Always make sure that any interest you charge is lawful and included in your payment policy to avoid debt forfeiture or a fine.
List the due date in your terms and conditions, quotations, account application documentation and invoices.
Placing a due date on a bill encourages your customer to include it in a current or upcoming billing cycle.
Don’t wait 30 days from the date of service or delivery of the product to send out a bill. The sooner you send out the bill, the more likely you will get paid sooner.
Make contact when a payment falls behind
When a payment becomes past due, immediately make contact to ensure that there is no reason for non-payment.
Send a reminder bill noting the amount owed as well as the fact that payment is now past due. Many customers are so busy that they simply forget a bill hasn’t been paid.
Keep a record of all contact with the debtor. You will need the dates and times of your calls, letters and any other communication about the late payment, in case of legal action.
Keep a contact with each company or customer
Ensure to capture all relevant contact information, such as addresses, telephone numbers, directors, accounts payable contact details. This could be captured by a proper account application form.
Address each bill directly to the person who makes financial decisions in a business or the person responsible for the account.
Create a procedure for dealing with debts
You will need to decide what happens when payments are late.
- Generally, you first make a friendly telephone call to ensure that the job has been completed to customer’s satisfaction, then you may choose to send out a reminder. Then further communication could follow to the customer or business relating to late payment fee. If all of the above fails, consider to send it to EC Credit Control for collections.
- Everyone in your company should understand the process so they know where to direct those who owe debts when they reach out to you.
Paula Kruger, Area Manager, Wellington, Hutt Valley, Wairarapa.