As the UK economy emerges from the turbulence and uncertainty of the COVID-19 pandemic, there has never been a more important time to keep a keen eye on your cash flow. Did you know that more businesses go under as an economy comes out of recession, than actually during a recession? Unpaid invoices could cripple your business, so here are nine practical strategies to avoid bad debts.
1. Consider credit checking customers
This is worth doing if your customers are big spenders with you – or likely to become big spenders. In fact, if your business doesn’t take payment at the point the service or product is supplied, then a business credit check needs to be part of your new customer or client onboarding process. Much like personal credit checks, you can also find out a business’s credit score.
There are companies which specialise in this such as Dun and Bradstreet, Creditsafe and Experian. Even if you decide not to pay someone to do this credit check for you, it’s always worth looking up the company on Companies House. There is a lot of information there about the directors and the business. Are they who they say they are?
Credit checking doesn’t necessarily need to be for just new customers. In fact, a business credit check on your large customers every 6-12 months needs to be part of your continuity planning.
2. Change your payment terms for customers
Do you really need to give your customers 30 days to pay? How about reducing this to 14 or 7 days? Or for the customers who are always late to pay, how about asking for payment before you deliver the service? If someone has built up a debt or a slow payment history, make these late payers pay in advance going forward.
If you deliver long-term projects to clients, how about setting up a schedule of payments by instalments? Such as 50% upfront payment to get started, followed by more payments at key milestones.
If your customers pay little and often, such as under £100 per invoice, then getting them to pay in advance or via direct debit is the way forward. Who wants to chase unpaid invoices under £100?
3. Have a proactive credit control process in place
It’s really easy to slip into a mindset that a customer, particularly your good and long-standing customers, will eventually pay up. This is a dangerous mindset. This is why having proactive credit control is vitally important to avoid bad debts!
Understanding your customers’ accounts payable process.
Do you need a PO number on your invoice? How does the invoice need to be addressed and to whom? When a finance department is preserving cash for a business, they will reject an invoice for payment for the smallest reason. Oh, and the finance department is unlikely to tell you that they have done this!
Build a positive relationship with customers’ accounts teams.
It always helps to be nice to the person at your customer’s business who actually pays your bill. The stronger the relationship you have with them, the more chance your invoice gets paid promptly and not ‘delayed’. This may not be your direct contact. It could be someone in their finance or accounts payable team. So, who in the customer’s organisation is responsible for accounts payable? Can you get their name and contact details to help ‘ease the way for your invoice to be paid’?
Put in place a process for unpaid invoices
This is absolultely key to avoid bad debts. It could include a series of communications when the invoice is issued, then a call or email the day before the invoice is due to see when it is going to be paid. Then a series of calls or emails a number of days and weeks after the invoice is due to be paid. Most accounting systems such as Xero will have a feature for automated reminders for invoices. If you need more than the basic invoice chasing that this software will provide then consider using a more sophisticated credit control tool such as Chaser.
4. Consider getting your customers onto a direct debit to pay
If you have customers who are regular customers then getting a direct debit mandate signed from them is a great way to be more in control of when they pay you. GoCardless is an inexpensive direct debit solution that integrates well with the likes of Xero.
5. Set credit limits
Remember you are not a bank for your customers. Of course, there is always a balance to be had by setting credit limits. Set them too low and you will dissuade customers from making the bigger purchases. Set them too high and your customers may run up a large debt which they can’t pay, and suddenly it becomes your problem.
6. Keep your ear to the ground
As your accountant, we can’t break client confidentiality, but you’ll find that the small business community may often know whose business is in trouble or who is a bad payer. In fact, having a quick chat with someone else who has had business dealings with someone you are thinking of taking on as a customer may very well help you avoid bad debts!
7. Get someone else to call them when a bill goes unpaid
When you are the first point of contact with a customer, it is often difficult to talk about monies owed whilst preserving the relationship. This is why it can help to have someone else talk to them about their debts and how they plan to pay them – such as your accountant.
8. Make it easy to pay your invoice
This is such a simple one but easily missed. Make sure you are removing any barriers to pay your bill, such as:
· Including a ‘pay now’ button linked to a payment gateway on your invoices. For example, Xero will do this for you with your Stripe account.
· If you visit the customer on-site, then have the means to take payment whilst you are on site, e.g. with a card machine – or an app on your phone to take card payments, which means you won’t need the expensive and bulky card reader.
· Including your bank details on the invoice. (You will be surprised how many businesses and tradespeople don’t do this).
9. Invoice promptly and make sure you have no billing surprises
The longer you take to invoice someone, the more likely the bill won’t get paid. Of course, no invoice normally means no payment… Before you bill someone, always make sure that:
· They are aware and expecting the bill
· They have agreed to pay the bill
And finally, if you do all of this right and your customer still refuses to pay, then you can always go down the formal debt collection route.
Need some help reviewing your business processes to avoid bad debts – then contact us for your free review!