Small and medium-sized enterprises (SMEs) should look to make a clean start early in the new financial year, advises Roger Mendelson, CEO of debt recovery company Prushka.
“Many SMEs tend to carry over their bad debts into the new financial year, because write-offs must be made prior to June 30 and most don’t get around to doing it,” he says. “While it is too late to write off those outstanding debts for last year’s tax purposes, well over-due accounts should be outsourced to a collection agency and any not paid should be written off during the 2015 tax year.”
Mendelson adds: “Directors tend to not receive adequate reports about the credit and collection system of the company and tend not to ask, on the basis that doing so is micro-managing. However, a role of a director is to ensure that the company is handling its billing and collections functions properly. Asking for the right reports is a good starting point. Ask for aged debtor summaries, broken down into 30 days, 60 days, 90 days and over 90 days and ask what steps are being taken with 60-day-plus accounts.”
Prushka’s recent research found that 46 per cent of SMEs were looking to grow in the second half of 2014.
“For most SMEs, a good way to grow is to grant credit and to compete by offering attractive payment terms, rather than competing on price,” says Mendelson.
“This of course means taking on more credit risk. However, this shouldn’t be a daunting prospect as long as you have some stringent back office functions set to protect your cash flow.
“Use the new financial year as a reason to revise your trading terms and make sure they are set up properly to protect your business. Create a new client form which will provide you with basic information on your new customers to allow for a quick and easy credit assessment – name, address and if they are a home or property owner. Also include a clause in this form so that when a client signs it, they acknowledge that if they default on their payment, they are liable for all collection costs on top of what they owe.
A standard new customer form can be downloaded free of charge from www.prushka.com.au and you can adapt this for your business.
“Finally, refer any of your old, written off debts to a collection agency which offers a ‘no recovery, no charge’ service, meaning you can chase these debts at no additional cost.”
With growth now being the focus for many SMEs, after several years of survival mode, it is important for boards to ask management the following questions:
What steps are being taken to grow the business? Evaluate the steps you are taking to expand your business and ensure you are set up to handle an increase in clients. Provide flexibility on payments by granting credit to clients. It’s a great way to attract new customers and increase business from your current ones.
What are your business trading terms and collection policies? Ensure your trading terms are set up to provide that in the event of default, the bad paying customer becomes liable for all your collection costs. Importantly, also ensure you have a stringent collection policy with a clear timeline of steps and stick to them. For example, put in a call to the debtor on the date payment is due and refer accounts to a collection agency after 60 days. Slow payers will take advantage of any weakness so it is important to enforce your collection policy consistently. One follow-up statement is ample. Anything more sends the message that you aren’t serious.
Do we have overdue debts and what are we doing to recover them? Prushka’s research has found that businesses are holding onto debts for longer in an effort to avoid collection costs (63 per cent of accounts referred in the past three months are older than 90 days). Unfortunately, the longer a debt is left, the harder it is to collect. Management should review the ledger and ensure that debts are outsourced no later than 90 days and preferably after 60 days. With the correct clause in your trading terms, the collection costs will be added to the outstanding debt.
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