Healthy cash flow is the lifeblood of any business and the key to this is intentional and proactive debtor management.
At the outset, you want to have clear terms and conditions (and even have a lawyer look over these). You could even decide upfront on a strategy to help you be selective about the clients you take on board so that you attract the right (e.g. prompt-paying, financially sound) customers. Read on for more ideas on updating your debtor management mindset.
Set clear definitions and clear expectations
If you don’t yet have a set of terms and conditions for your business, you can work them out more or less by researching other websites or service providers similar to yours. Once you have a fair idea of what’s important to you, you can draft a set of terms and conditions for your business and then have a lawyer look over them. This will also work out cheaper than having a lawyer draft them from scratch.
Clear terms create clear expectations. It also means you can enforce these if necessary.
Having contracts in place (with clients as well as suppliers and staff) also creates clear expectations and clear consequences. Keep in mind that contracts look after the interests of both parties and, done well, they not only prevent you from losing money and disrupting your cash flow, but also help build good relationships. From this perspective, it’s well worth investing in the services of a lawyer to help you draw up contracts.
Payment terms are often determined by common market practices in your industry, but that doesn’t mean you have no say in the matter. You still have options, like insisting on a cash deposit or operating on a cash-on-delivery basis. Feel these out with your clients.
In the case of outstanding invoices, make sure you have a game plan for chasing these up. There is a ‘golden period’ (typically less than 30 days overdue) when your chance of collection is the highest. Your initial game plan can include a friendly email, followed up with a statement and then a friendly phone call (with a few days in between each of these steps).
After that, you may have to resort to sterner action. Not quite lawyers just yet but, for example, charging interest on the debt (if this has been communicated in your terms upfront and your client pre-warned) or getting an accountant to chase up on the payment. You should also consider ceasing further work until the outstanding invoice has been paid.
You may also want to relook your terms for next time and with new clients, for example, getting paid upfront until the relationship is better established.
Choose your clients
It’s one of the best things about having your own business; the ability to make certain choices that would not always be available to you were you employed. You choose your clients through the marketing and pricing strategies you put in place. Define or review these so that you attract the right clients (the clients you want).
If appropriate, you can also consider checking credit records and payments histories before engaging with customers on a permanent basis. But make sure this cost is viable for you and that you have prior written consent to do so.