Small businesses should focus on identifying non-paying customers and make it a key priority in the New Year, according to a new report.
The American Express study says small businesses need to deal with customers who use their services but refuse or struggle to pay their bills.
Jason Fryer, American Express head of small businesses services in Australia, says small businesses can identify these customers by taking measures beforehand.
“The solution is the due diligence you do before you start doing business with any new customer,” Fryer says.
“You need to have systems in place that allow you to get a feel for the financial security of potential new customers before you extend any form of credit.”
Fryer suggests making every new customer complete a credit check document.
“You must ensure this form allows you to understand information about the prospective new customer’s employment history and current job situation, including information such as the length of time the person has held his or her current job and also their previous position,” he says.
The credit check form should also allow you to collect information such as personal or business references, particularly if you sell big-ticket items or if you engage in business-to-business sales.
Fryer says you also need to check the references provided and the new customer’s credit rating.
“Too many small businesses think collecting credit references is enough… All too often these businesses find out the hard way a customer has a poor credit history,” he says.
“Taking time to make a couple of phone calls to other businesses, with which your prospective new customer has had previous dealings, would have revealed they have a history of not meeting their obligations.”
Fryer says all the major credit bureaus can provide start-ups with an individual’s credit report for a small fee, which is “money well spent” if it uncovers a prospective customer with a poor credit rating.
However, even if a prospective customer is a credit risk, firms can still do business with clients, providing you don’t offer them credit.
Instead, businesses can ask them to pay for your goods and services in advance, and reconsider extending credit to them if they prove their ability to pay on time.
In addition to identifying non-paying customers, American Express says small businesses should aim to set three key goals in 2011.
According to the company, business owners should set goals annually in consultation with key staff.
“[Otherwise], your staff won’t know what they are working for and, as the business owner, you won’t be able to define what success means for the business,” it says.
American Express says the goals must be achievable, measureable and understood by staff, and one of the goals must relate to profitability.
“Let’s say you run a bakery. Your profit goal might be to increase your profits by 15% during the year,” it says.
“You might also have a goal to reduce your overheads by 10%. Your final goal might be to broaden your product range to include two new lines.”
“Once you have set out your goals, you can then start developing initiatives to meet them… Then create work-in-progress action lists for achieving each goal, with deadlines for completing each task.”
“Take these steps and you’ll find you and your staff are more motivated and that your business is constantly improving.”