Blog Layout

Managing Cash Flow & Avoiding Bad Debt in Business

Leah Langton • Mar 28, 2024

Getting paid on time is essential for managing cash flow and establishing a profitable business. And while staying on top of unpaid invoices helps, there may be times when a customer can’t or won’t pay. Here’s how to handle it.

Debt Management


Even thriving businesses can fail if they run into problems managing cash flow. In fact, the Australian Securities and Investments Commission (ASIC) cites this as a major cause of companies going under. To reduce the likelihood of overdue payments becoming bad debts, it’s essential to establish clear payment terms. You’ll also need tight credit control and systems that motivate your customers to pay promptly. Putting debt management policies and procedures in place can also help when a customer or client suddenly runs into payment issues of their own.


Read on for ways to create a healthy cash flow model and protect your business from bad debt.


6 steps to tighter credit control


Tight credit control is your first line of defence in maintaining your company’s financial health. Here’s how to avoid or limit your exposure to bad debts:

  1. Draw up new terms of trade and, like all business documents, have it checked by your accountant and lawyer. Require customers to sign your terms of trade before extending credit terms.
  2. Complete a credit assessment and reference checks before you offer credit to new customers.
  3. Set reasonable but fair credit limits and instruct your staff to notify you if a customer wishes to exceed an agreed credit limit.
  4. Approve additional credit extensions in advance.
  5. Include clear payment conditions in your terms of trade agreement and implement your terms to new customers. Make sure your terms of trade specify when you’ll start to charge interest on overdue amounts and the rate of interest you’ll charge.
  6. Remember that if you do sell on credit, you need to factor possible payment delays into your cash flow forecast.


Your payment terms


Structure your payment terms to encourage prompt payment. For example, you could offer a five per cent discount for payments made within 30 days, or charge interest on outstanding balances. Be firm – don’t allow the discount if the payment is late, even if it’s only a day late, especially for new customers. If you know your customers well and value them highly, you might make exceptions occasionally as part of fostering those business relationships.


Make your payment terms clear and state that you expect to be paid on time, every time. And, always make contact if payment is late – you'll be more likely to be front of mind when customers schedule payments. You’ll then find that a customer juggling payments is more likely to prioritise you over a business whose systems are more relaxed. Many businesses ‘pay the ones that make the most noise’. Within reason, make sure this is you.


Prevention's easier than collection


Good systems are the best way to avoid bad debt. Here are our top tips:

  • Send out your invoices and statements on time, preferably as soon as the job is complete. Larger businesses have set payment cycles, so prompt invoicing means you’re less likely to miss the next payment cycle.
  • To ensure your overall business health, keep up-to-date records of what each customer owes you and note any customers approaching their credit limit.
  • Follow up immediately once payment is noticeably overdue and try to uncover the problem. You don’t want to appear desperate for the money, but small invoices can often be missed, especially if your client is a large business.
  • Judge each case on its own merits. That might involve allowing a debtor an extra month to pay their invoice while they work through cash flow problems. Alternatively, writing off late payment penalties could be in your best interests if you’re chasing another large order from someone. However, if doing so places you in danger of not being able to pay your own bills, then it’s not in your best interest.


Dealing with overdue payments


Your approach to overdue payments will vary depending on the customer and how late the payment is. However your first step should always be to find out why the payment is late. Some common reasons include:

  • An issue with your product, service or invoice. Once sorted with the customer, this eliminates any further excuse for not paying.
  • An accounting or payment system glitch – which can also usually be resolved quickly and amicably.
  • A customer with temporary or long-term cash flow problems. This can be trickier, but if you negotiate an agreed repayment schedule in writing it may enable them to trade out of the current tight spot.


To protect yourself, stick to your terms of trade. Stop supplying customers who haven’t paid their accounts on time and customers in excess of their credit limit.

If cash flow issues become a problem in your business due to late or overdue payments, one solution offered by lenders is invoice and debtor finance, which provides access to funds based on the amount owed to you by debtors.


Tips for debt recovery


If all else fails, seek debt advice from a collection agency or your lawyer about the most effective way to recover the money you’re owed. Before doing so, contact your customer by phone or in person one last time. Let them know you plan to pursue debt recovery services.

Once you hand the debt over to a third party, there’s a strong possibility the customer will realise you’re serious. Typically this means they’ll pay up straight away – in full or in agreed instalments. Most of the time, a letter from a lawyer or agency is enough to do the trick.

If not, and you need to engage a debt collection service, compare costs beforehand, as fees vary. Services are likely to charge a flat fee or a percentage of the debt recovered, or a combination of both – plus any additional charges. Also, consider the amount of money you’re owed. In some cases, it might be better to write off small amounts to preserve your business relationship.


Resolving disputes

Sometimes it’s worthwhile trying to resolve disputes using an intermediary, who'll listen to both sides of the story. Contact the fair trading agency in your state to see if they can act as an informal negotiator. If you can’t resolve the dispute, then your next step may be to get legal advice or lodge a claim with the Small Claims Tribunal.


Source: NAB
Reproduced with permission of National Australia Bank (‘NAB’). This article was originally published at https://www.nab.com.au/business/small-business/moments/manage/planning/avoid-bad-debts
National Australia Bank Limited. ABN 12 004 044 937 AFSL and Australian Credit Licence 230686. The information contained in this article is intended to be of a general nature only. Any advice contained in this article has been prepared without taking into account your objectives, financial situation or needs. Before acting on any advice on this website, NAB recommends that you consider whether it is appropriate for your circumstances.
© 2023 National Australia Bank Limited ("NAB"). All rights reserved.


Important:
Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business nor our Licensee takes any responsibility for any action or any service provided by the author. Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.

What does the Federal Budget mean for me?

By Oliver Holcombe • 14 May, 2024
Treasurer Jim Chalmers has high hopes that his 2024 Federal Budget will rein in inflation earlier than expected, ease cost-of-living pressures and build a stronger economy in the future.

Federal Budget 2024-25: Tax Implications

By Ryan Troe • 14 May, 2024
Major tax cuts were the centrepiece of the Albanese government’s third Federal Budget, even though the changes have already been announced and legislated. Small businesses can breathe a sigh of relief, with the popular $20,000 instant asset write-off hanging on for another year and a valuable bill rebate on the way to help with the burden of high energy bills. Tax cuts for everyone From 1 July 2024, all 13.6 million Australian taxpayers will receive a tax cut, with the average taxpayer’s tax bill being $1,888 (or $36 a week) lower. Under the new rules, the lowest tax rate reduces from 19 per cent to 16 per cent, with the 32.5 per cent marginal tax rate reducing to 30 per cent for individuals earning between $45,001 and $135,000. The current 37 per cent marginal tax rate will be retained for people earning between $135,001 and $190,000, while the existing 45 per cent rate now applies to income earners with taxable incomes exceeding $190,000. Low-income earners (under $45,000 p.a.) are the biggest winners from the changes. A single taxpayer with a taxable income of $40,000 who pays $4,367 in tax in 2023 24, would have received no benefit from the original Stage 3 tax plan, but now receives a tax cut of $654. Boost for tax compliance On the revenue side, the Budget includes savings of $2.5 billion in tax receipt measures through a crackdown on the shadow economy, fraud, and tax avoidance. Taxpayers can expect the ATO to continue its recent tougher stance, with technology upgrades to enable better identification and blocking of suspicious activities in real-time and a new compliance taskforce focussed on recovering lost revenue and stopping fraudulent refunds. Foreign residents will pay an additional $600 million over the next three years due to strengthening of the capital gains tax rules applying to this group. Law change for old tax debts However, one controversial measure, labelled ‘robotax’ by the media, may be abandoned, according to the Budget papers. The ATO had been calling in historical tax debts, some accrued more than a decade ago, saying it had no choice under current laws. But the government now intends to change the tax law to give the ATO discretion about whether to collect the individual, small business, and not-for-profit debts. Instant asset write-off retained The deadline for the $20,000 instant asset write-off will be extended to 30 June 2025, allowing small businesses with annual turnovers of less than $10 million to immediately deduct eligible assets. In addition, $23.3 million will be spent boosting adoption of eInvoicing to help improve small business’ cash flow and productivity. Relieving energy bill pressure Direct relief for small business energy bills will come in the form of a $325 rebate, while there will also be new funding for reforms to help businesses find their best electricity contract. Assistance for smaller entities With trading conditions remaining difficult, small business will receive $641.4 million in new targeted support. This includes $10.8 million to extend both the NewAccess for Small Business Owners program providing free mental health support and the free phone-based Small Business Debt Helpline. An additional $25.3 million will be provided to expand the Payment Times Reporting Regulator and help improve payment times. Nuisance tariffs abolished From 1 July 2024, 457 nuisance tariffs will be abolished by the government to cut business compliance costs. New funding to expand the government’s Digital ID system is designed to lower the administration burden for small businesses storing identification data on their customers and employees. Anti-money laundering crackdown The Budget includes $168 million over four years to pay for reforms to Australia’s anti-money laundering and counter-terrorism financing regime. Tighter rules are expected to result in lawyers, accountants and real estate agents being required to undertake due diligence on their customers and report any suspicious activities. Information in this article has been sourced from the Budget Speech 2024-25 and Federal Budget Support documents. It is important to note that the policies outlined in this article are yet to be passed as legislation and therefore may be subject to change.
Share by: