With the uncertainty created by the covid 19 pandemic and the restrictions put in place to try and manage it, a lot of stress has been put on Australian businesses and the overall economy. To try and mitigate some of this stress the Australian Government made temporary changes to insolvency and bankruptcy protections, effectively making it harder for businesses to come after creditors that haven’t paid their debts and removing the penalties for directors who have traded whilst insolvent.
While this has been important to try and prevent otherwise healthy businesses having to go into liquidation during the pandemic it has also resulted in a number of “zombie” businesses continuing to operate rather than being allowed to fail naturally. These protections have now been extended through to the end of December so there is a real concern these companies will continue to operate under these protections through to the end of the year and will then fail once the protections have been removed, effectively delaying the inevitable at the cost of other businesses.
The risk to our clients is they could potentially be doing business with these “zombie” businesses without their knowledge and risk delayed or nil payments for work and materials provided by these businesses.With the uncertainty of lock downs and the world economy still looming it is important that businesses sure up their working capital as there is a high risk these “zombie” businesses will take a lot of otherwise healthy businesses down with them if they aren’t careful.
So how can our clients fight off the zombie hordes? Through the implementation of a strong debtor collection system. There are a number of things businesses can do to sure up their debtor collection, some of which include;
- Establish a credit policy – Screen customers before providing goods and services on credit. This can include checking credit references from existing suppliers and should also include the clear setting of the terms of credit (ie. When you expect payment and the penalties that can be enforced with late payments).
- Make invoicing clear – Making sure invoices are clear and accurate, highlight the amounts owing and provide simple effective details regarding how to make payment.
- Invoice earlier – A client can’t pay an invoice if they haven’t received it. So get your invoices out as soon as possible. Potentially look into invoicing immediately on taking the job and charging an upfront deposit to have cash available for use for the project.
- Use the quickest payment method – In order to reduce processing time encourage clients to use direct funds transfers and BPAY arrangements to speed up time between payments by the customer and receipt.
- Offer early settlement discounts – Customers can be encouraged to make payments earlier if they receive a discount. Organisations will need to asses whether the benefit of the payments coming in early outweighs the loss of revenue from the discounting.
- Have a designated staff member in charge of debtors – Having designated staff members in charge of debtors allows for easier tracking and breeds familiarity with clients, which means you will be better informed when customers are having issues with payments and will give a clearer indication when payments will be made..
- Follow up overdue accounts – Have the designated staff member track accounts and have a system in place to chase up accounts overdue. There are a number of automated systems on offer that will automatically send out reminder emails after set periods but it is also important to contact these clients in order to try and set up a commitment from them to pay the overdue amount in a set time period. If this fails legal letters/collection agencies may be required.
- Stop credit – As part of the initial agreement you should set clear terms as to when you will cease to provide goods and services on credit until overdue accounts have been settled. This should be a length of time that allows some flexibility whilst not putting your business at risk should payment not be made.
- Security – Establish trading terms whereby title to goods does not pass until full payment has been received or require customers to provide director guarantees.
Not all of the above steps will be suitable for all businesses however the majority of these steps should be followed when setting up creditor arrangements with your clients.
