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The solution to small business late payments (Part 2)

In Part 1 of Small Business Late Payment Solutions, we talked about how late payments are costing small businesses and that everyone – big business, small business, bookkeepers, accountants, advisors and small business advocates – all need to do their part to fix this issue.

The discussion touched on the importance of technology and credit management. The point was made by Noel Tiufino, Managing Partner of My Accounts, that a lot of small businesses do not perform credit checks prior to issuing terms of trade; “Every business, whether they are in a good position or bad, should have a technology-enabled process,” Noel explained.

Many small businesses are completely unaware that there are tools on the market that help you to get paid faster and the best part is, they are accessible.  However, Angus explained that businesses need to see the benefit with their own eyes that technology is beneficial and accessible. Here are the main points to keep in mind from the conversation.

Technology and human interaction work together to improve cash flow

Raj Saini, Partner at My Accounts, said he is finding that technology is improving things for his clients; “There is a lot of technology out there, not only to chase but to get paid in advance. There are a lot of tools out there to enable you to get paid faster.”

“You know, we found throughout our report small businesses with a payment solution on their invoice get paid 55% faster,” explained Angus Capel, Small Business Advocate at Xero.  He explained that delays increase exponentially when invoicing is done manually on paper. Moving invoices through a solution like Xero will help the invoice get to the right department and automation can create reminders as well.

While it is important to embrace all of the technology that is out there to help you collect your receivables, it is also vital to maintain the human side of the process.

“You’ve got to be regular and build relationships,” explained Raj. “There are still going to be escalating points and that’s got to be personable. I don’t think just technology on its own can give you the results. After a while, automated messages will be ignored, and the debtor won’t pay unless they know that someone is physically chasing it up, so you’ve got to define points of escalation and just be consistent in your process.”

Credit checks are essential and accessible for entities of all sizes

Credit management and due diligence are essential components of business.  However, many small businesses are skipping this step.

“I think that small businesses think that credit checks are a tool of big business,” explained Angus Capel. “I just think that some have this perception that it’s going to be really complicated, really expensive, and feel they may not see the benefit in it or perceive it’s going to be too difficult.” The lack of awareness or advice around this could be fixed. Noel argued that it is really important that bookkeepers or advisors are advocating this to their clients.

“I just don’t think that entities know how easy it can be to access technology like CreditorWatch,” agreed Raj.

“The software to help with credit is accessible so there’s no reason why we shouldn’t be using it. I don’t think any are out of price point,“ argued Noel.

Onboarding customers with technology saves you time and money in the long run

“Let’s say you’ve got a new client and they say, ‘Advise us the best you can.’  I would suggest onboarding with a credit software like CreditorWatch in the beginning, perform the necessary due diligence and opt to monitor your clients. Then integrate Xero and link automatic payment reminders and have multiple payment options on Xero invoices that are going out.  If you set all of that up from the beginning – it’s conclusive that you will have better credit?” asked Noel.

“Absolutely.  Having all of those systems set up when you’re starting makes your life as a business owner so much smoother. All of a sudden, you’ve got hours back in the day where you can be focusing on your big idea and why you got into business in the first place,“ explained Angus. “It just seems like it is a crucial step to onboard customers by utilising the tools that are available, cheap and accessible. “

The best part is, software like Xero and CreditorWatch are accessible to all types of businesses by being cost-effective and easy to use.

“it’s a no-brainer. It’s going to pay off, “said Noel. “One bad debt on no credit check has paid for your CreditorWatch subscription two, three, four years, depending on how big the debt is.“

“It’s just small businesses understanding that, and it doesn’t take long to implement. If you understand as a small business to avoid dealing with a company under any circumstance due to its adverse credit history, that single piece of advice could have paid for a couple of products for a few years,” explained Angus.  “Think of a subcontractor who isn’t going to get paid because he’s had contractors phoenix. The subcontractor would be unaware of this without a credit check and monitoring. You know, that could be tens of thousands of dollars.”

How can credit management software help?

Software is crucial to your credit management. You can perform a credit check on any entity in Australia. The data is easy to navigate and you can very quickly identify if a customer is worth dealing with. In addition to credit reports, you can also monitor for adverse data and utilise debt collection tools. If a debtor isn’t paying after follow-up attempts, then you can lodge a payment default which will then alert other CreditorWatch members who are monitoring the customer. Accounting software like Xero can be integrated with CreditorWatch.

By knowing who you are dealing with, you can make changes to payment terms, make informed decisions on whether or not to do business with the customer/ supplier, and begin taking action if necessary before the customer collapses. “This is why CreditorWatch is important. If you don’t know someone’s defaulted, you can’t really do anything about it unless you know,“ explained Noel.

“You can still do business with those type of companies, but it’s as long as you know what to expect. After viewing a credit report you might say, ‘Okay, they are probably going to be up to 60 days overdue on that 30-day invoice.’ You can actually decide whether you want to pick that up or not. And I think that all the power is sort of levelling out there through that information, explained Angus.

Consistency is the rule of thumb for credit management

“There should be a credit management process for every client whether they are in good times or bad. So, you’ve got to remain consistent. For example – tracking Debtor Days and reporting on that on a monthly basis,” Noel explained.

Running annual reports to ensure that your customer data is correct and to check for adverse changes is also important.

Review and update payment terms regularly as well as the process and procedures needed to follow up on late payments.

Be aware of payment patterns

Stay up to date with payment patterns and the latest data and monitor how customers are paying you.

“You know, we’ve found that our businesses that are paid faster than average pay their own suppliers faster than average,” said Angus. “Just managing how you get payment from your suppliers really has a flow on effect through to the rest of the economy.”

If a customer or supplier is consistently paying late, then take that into account and reduce the terms on the invoice.  “We found that no matter what the invoice length was, a week would be added to it. So if a seven-day invoice was issued, it would be about 14 days until it was paid.  14 days would be 21 days and so forth,“ explained Angus.

“I think the only thing from me is that small businesses and their advisors need to be aware of the tools available and all they can do is implement the best practices they have available to them.  People like us need to continue to have these conversations. If the problem persists after businesses have done everything they can, then we can start to carry it forward and put pressure where it’s needed if it continues as a systemic issue,” said Angus.

For now, we must be empowered by what’s in front of us, and it is not out of reach.

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Lindsay Simoncavage

Lindsay Simoncavage

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