We all know sales are critical to business survival. But sales mean nothing if we don’t collect what we’re owed. Cash is the oxygen your business needs to live and breathe, and it’s what pays workers, rent and expenses.
ASIC figures show poor cashflow is why most businesses fail. In fact, 62% of business owners surveyed by Xero revealed most didn’t think they’d survive more than three months if their invoices went unpaid, and the strain caused by late payments led to the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) launching an inquiry which found 20% of businesses had to wait an average 60 days to be paid.
Sixty days is an eternity if you’re already constrained by limited resources. And despite discussions about regulatory frameworks to encourage faster payments, businesses need a proactive approach because not doing enough is fatal to their survival.
The longer you wait, the harder it is
The ASBFEO inquiry found owners prioritised running and growing their business and issuing new invoices, before chasing debtors was even considered.
But the likelihood of recovering what you’re owed reduces the more you delay. Surveys show the chance of collecting an outstanding amount is only 69% after 90 days. After six months, you only have 51% chance of recovery, dropping to 21% after 12 months.
Why structure is important
Limited resources mean most small businesses averaged less than five hours a week chasing payments, meaning a structured approach is essential. Structure provides a strong foundation to minimise losses as your business grows, and faster payment can release thousands of dollars into your cashflow.
The power lies with embedding certain practices in your day-to-day, so the time you dedicate to chasing late payments is efficient and effective.
Send your bills quickly
Most businesses agree prompt and correct invoicing encourage faster payment. State and federal governments have specialised areas that support small business, such as Business Victoria, and provide guidelines and templates for what invoices need to include.
Calling clients a day or two after sending your bill allows you to address issues quickly. Treat it as relationship building: check they’ve received the invoice and happy with the services provided. Confirm who needs to approve payment and whether anything else needs doing before they pay.
Process, process, process!
The longer you wait, the more you risk not being paid. People forget or move on, and clients can go out of business.
Set aside time each week to focus on following up and who hasn’t paid, as this could save you from continuing to sell to someone that’s never going to pay you.
Decide on your process and what’s acceptable — for example, 14-day terms, a follow-up call close to due date, and sending out reminders seven days after. Stick to it. Make sure you call customers and follow up in writing because studies show in-person communication is 34 times more effective than just sending emails.
Making it easy to pay can speed things up. Most accounting systems allow you to send invoices with a direct link to a payment portal. Include this link in email follow-ups, and allow credit card payments for smaller amounts to save you time and stress.
It’s easy to get excited when you land a new client but remember to formalise it. A handshake or casual email won’t protect you if there’s a misunderstanding or when something goes wrong. The result could be costly, including a lawsuit which can wipe you out completely.
Agreements don’t guarantee payment but it creates a clear record of your client agreeing to your terms of payment and what happens if they’re late — such as withholding final deliverables, late payment penalties, or stopping supply. It also helps if you need to go to a small claims court or use a collection agency to recover what you’re owed.
Templates for agreements and engagement letters that cover most situations are available from the small business support agency in your region, or websites such as Rocket Lawyer — but have these documents checked by your lawyer.
The great unknown
If a new client doesn’t have an established track record, pay attention to comments about having a limited budget, any disorganisation or constant questions about your rates. Consider doing reference or credit check (some checks need written client consent). A Google search could unveil unexpected information.
Try a small trial project before going bigger, or asking for 50% upfront with milestone payments at agreed times during the project.
Know your customer
Staying up-to-date with changes in your industry not only helps your business stay relevant, but you also get insight into what your customers are doing. It helps identify which clients are experiencing trading decline or financial stress, giving you the chance to take proactive steps before it hurts your cashflow.
Show empathy if a client needs to extend payment as they’re also likely to be waiting on payments too, but remember your priority is to ensure your business survives. Agree a payment schedule with firm dates and amounts which are confirmed in writing.
If accounts remain outstanding, make sure you follow a consistent collection process.
Always be polite because it can be a genuine misunderstanding, like an invoice ending up in a spam folder, a client honestly forgetting or waiting on you to send an amended invoice. A ‘just checking in’ email can easily sort out late payments while staying on good terms.
Double check you’ve done everything you’re obligated to do: the invoice was actually sent, payment terms were clear and there were no mistakes they’re waiting for you to correct.
And if non-payment persists, firmly (and politely) remind them payment is outstanding and the terms they agreed to.
Communicate your next actions clearly: before charging late payment fees, tell them the date these fees will start. If you have a policy of issuing a formal letter of demand after X number of days, include the date you’re going to send it. If you’re sending it to a collection agency or a small claims court, give them notice because they might rectify payment to avoid your next action.
Be consistent with what you communicated previously and take action when you say you’ll take action. Keep a record of all correspondence and stay polite, even if you’re frustrated, so your reputation remains intact.
Move on when you need to
It may no longer be worth your time or energy to persist with an outstanding amount. Collection agencies generally charge a percentage of what they successfully collect for you, but it’s still more than you’ve received without them.
Engage a reputable firm because there can be strict guidelines on what debt collection practices are acceptable in your region. Your local consumer affairs organisation and the Australian Competition and Consumer Commission (ACCC) can guide you on what’s acceptable where your business is located because brutish tactics used on your behalf can reflect poorly on your business.
Late payments cost more than you think
Not only do late payments affect your profitability, but it also puts 35% of businesses at risk of insolvency. In fact, 78% of business owners admit it causes them stress and anxiety and affects their mental wellbeing because the stakes are so personal.
A structured collection process is a way of taking back some control. Firmly and politely stand your ground, do your due diligence, ask for payment upfront or withdraw services to customers who constantly cause problems. An efficient collection process allows you to maximise the collection of what’s owed to you, while still having the resources to continue sustainably grow your business.