Five tips for avoiding bad credit

"Paid" stamped on invoice

After spending many years focusing on getting yourself up and running, looking at sales and working on the front end, it’s likely that the back end—your administration and accounting practices—have been left somewhat forgotten. With more and more customers defaulting on payments, now more than ever is the time to get your business’ accounting practices into shape.

If you’re just starting out or think you might need to change established bad habits regarding how you deal with your accounts, here are some ways to improve.

1. Set up systems

It’s not simply a matter of sending out invoices when you have the opportunity after finishing work one day; it’s important to have clear accounting systems in place. This includes sending out invoices with each delivery, and following up on late payments.

If you’ve been clear on your invoice as to when payment is due, be sure to follow up if the payment is late. Establish how long you can wait: for example, you might follow up after seven days with a statement. After 14 days, follow up with a phone call. If a customer is used to hearing from you on a regular basis, they’ll be more likely to pay up.

“It’s about training your customers to pay on time and to your payment terms. The squeaky wheel gets paid first,” says Colin Porter, managing director of CreditorWatch an online peer-to-peer credit monitoring system.

Most importantly, remain consistent with your practices with each and every customer.

Scott Kelly, managing director of Urban Rituelle, says “We were very relaxed about chasing bad debts when we first got started. I think many businesses start off that way.”

2. Publicise your policy

It’s not just a matter of individually deciding what your accounts receivable policy might be, it also needs to be discussed with all staff and, most importantly, your customers. This means keeping them informed from the beginning as to when payment is expected and ensure that they agree to this process, in writing, before you conduct business together.

“We’ve really tightened up our practices,” Kelly admits. “As you mature as a business, obviously your debtor list grows. In some instances you learn the hard way, so we have found the need to improve.”

Once systems are in place, it’s even easier to manage them in house, particularly as staff may come and go. “You do have to have these job descriptions, and the processes involved in the job, recorded because there’s always turnover of your team. When the next person comes into that job role, you want there to be a structure that they can follow. Then they can adapt and make it their own over time,” Kelly adds.

3. Have an eye for detail

While your regulars may know you as ‘Bill’s Bits and Bobs’, it’s important that all invoices are labelled with your correct trading name. “If you don’t have your correct name on your invoice, it could be filed by your customers in the ‘too hard’ basket and cause you trouble later on,” Porter says.

The same also goes for listing your correct ABN, purchase order numbers and contact details—and of course those of your customer.

4. Stay up to date

Don’t assume that your customer’s details, or their ability to pay on time, haven’t changed, even with your long-term customers. “Quite often you might not see a client for three or four years and then they come back and you just leave their previous account in place,” says Peter Meyer, managing director of Blinds by Peter Meyer. “That’s not always the best thing to do. It’s a good idea at that point to run them through a checking system like CreditorWatch.”

Registering your customer’s ABNs with CreditorWatch is easy, says Porter, and could save you from discovering their bad debtor status too late.

5. Look for help

There are services out there that can help SMEs with their accounts. CreditorWatch is just one. It allows you to register debtors with the community, so your fellow businesses can be wary of non-paying customers. This means you can also keep track of customers that others have registered, including adding them to watch lists. CreditorWatch also can alert you if there’s been any investigation by or registration of a business going into administration with the Australian Securities and Investments Commission.

This is an important function that can help you in the future. “The businesses that end up defaulting are potentially the ones that you least expect. Make sure you have them registered,” Porter says.

“Our first thoughts were to use it as a double checking system,” Kelly says. “We already have our own internal systems which we adhere to, but to have that extra platform of checking to see if there was bad credit history was an extra bonus for us.”

Meyer agrees that there are areas where systems like default registries can help them improve. “We could certainly improve some of our practices but being in business makes it difficult, you have to keep your clients as well. There’s no business if you don’t get paid, but you also have to be lenient sometimes. We do try to keep an eye on our accounts; obviously we chase them pretty hard when they need to be chased.”

Porter emphasises the importance of the role of default registries, which started with great success in the banking industry, for sectors such as wholesalers to help each other prevent debt. “It’s about supporting each other through the community. A high proportion of gifts and homewares businesses use default registries to let other people know that customers haven’t paid up.”

Kelly agrees. “I do believe if the majority of wholesalers in my industry did embrace CreditorWatch it would help each other reduce bad credit by sharing that information. The more members, the better use it will be to everyone.”

This article originally appeared in Giftrap magazine, the Australian Gift and Homeware Association’s member magazine.