Bad debt is a cycle that can be difficult to break. Your client won’t pay you, so you can’t pay your suppliers, and nobody is happy. Here are some steps you can take to break out of the client debt cycle and keep your business in the black.
Customers must know where they stand
That means providing clear deadlines and policies, and securing a signed agreement first whenever possible. Penalty measures such as late payment fees can be effective deterrents, but they can also provoke a less-than-favourable response from customers, so make sure you’ve weighed all your options first. Conversely, offering incentives for early payment can also work.
Have effective accounting
Send invoices regularly and promptly, instead of when you have a spare minute. Track your accounts receivable so that you know which customers are falling behind in their payments. This will ensure you have all bases covered when you communicate with them. You may also want to provide the option of an ongoing payment plan if the full amount can’t be recovered right away.
Ask for payment first
If you are a service provider, asking for a percentage of the total fee upfront can protect you against major loss if the remaining balance never arrives. For longer projects, try to secure several payments along the way. This will give you a steadier cash flow and, in turn, help you to pay your suppliers more promptly.
If a client is significantly overdue on an invoice after multiple reminders, be firm about calling in a collection agency, or at the very least stopping further work until payment has been settled. Don’t forget that a consistently delinquent customer can take a significant toll on your company’s time and resources, as well as your overall peace of mind. Dropping them altogether is usually your best option.
Don’t give up too soon
There are any number of reasons a customer might miss a payment. The original invoice may have been lost, they may have entered an unusually busy period and forgotten about it, or their accountant may have gone on leave or been replaced. Whatever the circumstances, you will need to be able to show the ATO that you have taken all appropriate steps to recover the money before you declare it as a loss in your business activity statement.1
Practically every business owner has to deal with late payments at one time or another, but with good communication and a firm, consistent approach you should be able to bring bad customer debt down to a manageable level, if not break free of it altogether.
- ATO (point 41)