Getting stressed out with late payments?
You’re not alone. Any business has experienced dealing with late payments. Unfortunately, some of these late payments become bad debts that have to be written off. This can leave a business in a bad financial position if not managed properly.
When do bad debts occur?
Bad debts refer to any outstanding balances that are no longer deemed recoverable after extending credit to a customer.
Bad debt typically occurs when the debtor:
- Cannot be contacted or traced
- Dies and there are no assets or insufficient funds to cover the debt
- Becomes bankrupt or in liquidation and there are insufficient funds to pay debts
How to avoid bad debts?
Structure and be firm with your payment terms
A common strategy to encourage prompt payment is by offering discounts for early payments. For other businesses, they charge interest on outstanding balances.
Whatever your payment terms will be, stick to them. Be firm and do not give discounts even if the payment is only a day late. Make sure that your payment terms are discussed clearly to your customers. Implementing your payment terms should go hand-in-hand with your collection process.
Setup a collection process
A good collection process reduces the chances of your customers forgetting their payment cycle. It is a good practice to send invoices and statements as soon as you can. Identify the best time to follow up on payments that are nearing their due dates. Contact the customer either by email or phone calls to give them a friendly reminder on their upcoming dues.
To ensure you won’t miss anything, keep your records updated. Your record should have the contact information of your customer, the amount of their outstanding payment, and their payment dates. If possible, include your customer correspondence in your record for future reference related to the collection.
Have multiple payment options
Consider having multiple payment options available to your customers. This makes the transaction easier and more convenient.
Depending on your business, it is recommended to setup a direct debit payment. This works well for recurring payments. Here are some of the direct debit payment solutions to check:
- Eazy Collect
Conduct credit checks
Consider performing a credit check to assess the ability to pay your customer, especially if they are new. Do this prior to approving your customer’s credit.
There are many ways to conduct credit checks. One of the most common ways is obtaining at least three trade references from your customers. By asking these trade references, you’ll be able to ask if a customer is a good payer or if there are instances when they pay late.
Ask for money upfront
Asking for partial payment of the goods to be delivered or services to be rendered is great in maintaining a good cash flow. Upfront payment is beneficial to your business and relationship with your customers because:
- It gives reassurance that the transaction will go smoothly
- It reduces the risk of writing off bad debts
- It establishes professional commitment between you and your customer
Moreover, asking for money upfront gives a responsibility to fulfil their obligations throughout the transaction process.
Get help from a qualified bookkeeper
When you have plenty of things to attend to in your business, it can be difficult to look after your outstanding receivables. Time is essential in keeping a positive cash flow.
Having a qualified bookkeeper gives you the confidence that your outstanding receivables, as well as your cash flow, are looked after. It will be great if your bookkeeper partner is able to give you strategies on how to manage debts more effectively.
Want to know more about avoiding bad debts?
Focus Bookkeeping can help you!
We are also offering services like bookkeeping, superannuation, and BAS for your business.
Feel free to contact Fabiana for an obligation-free chat!