Small Business: Chasing bad debt

Office Torque Chief executive Lance Wickman. Photo / Supplied

Lance Wickman, Director and CEO, Office Torque Limited on Credit Management for SMEs.

What sort of ramifications are there for constantly chasing bad debt?

Most business owners understand the need to get their money in, but don't realise the significant impact slow payers have on their working capital until it is quantified. For a $10M turnover business, every additional (average) day of outstanding payments, consumes over $27,000 of working capital - money that has to be funded somehow and is not available for other activities.

Over time, the additional cost of borrowing further funds eats into profits and constrains the business from growing, or simply surviving. While the business may appear to be profitable on paper, the cashflow gap will increase over time, and eventually drive the business into bankruptcy.

The time and cost associated with collecting smaller accounts is no less than large ones. So naturally, a lot of effort goes into chasing the big amounts, and typically, the long tail of smaller accounts end up slipping out, eventually becoming delinquent. The longer it is left, the harder it is to collect, and the sum of a large quantity of smaller accounts can be significant.

Where do small businesses go wrong with slow payers, who may be important customers?

In today's economic environment, businesses are working harder than ever to get customers, and then keep them.

Important clients, understandably, tend to receive high levels of attention and service. Some businesses, however, make the mistake of becoming too "friendly" and commercially casual with their key customers. This makes it much harder to be firm about poor payment behavior when it's required.

Their clients are also being stretched financially, and they will be looking for the "soft" suppliers who are less rigorous and demanding about payment. Better to be firm and consistent, and not on the list of easy creditors.

Businesses should not be afraid to discuss alternate invoicing patterns, payment options and terms with their large clients. This should be a key element in any proposal or engagement model, which, if used well, can be a source of competitive advantage.

No matter how important a client is to you from a sales perspective, their value is only realised once they have paid. Until then, you are just a non-profit bank, assisting other companies with their cash flow while yours suffers. The problem becomes worse if you are heavily dependent on just one or two large clients.

How can SMEs stop the rot? What should they be doing at the outset?

A few key points to consider:

1. Not all clients are equal. So why provide them all with the same terms?

2. Be clear about your payment expectations upfront, and get clients to sign your terms of trade agreement.

3. Offer alternate payment options. Let credit card providers or invoice factoring companies provide the credit facility instead of you.

4.Consider prompt payment discounts. This is usually more attractive than the threat of penalty for slow payment which most people know are seldom acted on.

5.Invoice immediately, and make sure it is error free first time.

6. Establish a set of structured and consistent reminders.

7. Ensure that the reason for slow payment is not the result of poor service on your part.

How does your system change things for them?

PayTorque is designed to connect to existing software packages providing professional enterprise quality credit management capability. The rules-based system can easily be configured to match the needs and business processes for any business no matter what size, industry or complexity.

PayTorque also includes options for electronic bill presentation and a client portal where clients can view, dispute and make payments of their accounts on-line, any time. The majority of all the menial follow up work is carried out by way of automated reminders. The system is designed to flush out problems early in time allowing you to resolve them promptly and remove the barriers to getting paid.

If a call is required, you will be prompted at the right time and supplied with all the information you need to have a meaningful conversation. Or we can carry out the calls on your behalf using ExtraTorque, our bureau service.

The management reporting gives transparency to the real cash flow related issues, internal problems and the professional debtors in your client base.

Across our client base, PayTorque users are, on average, reducing their paper based billing costs by 90 per cent, reducing the time associated with manual follow up work by 8 hours for every 100 slow payers they have, increasing client "self-help" via the portal by 75 per cent, and reducing debtor days by nine days. The return on investment is typically between four to six months.