What to do when you're owed money
One of the great joys of small business is the freedom to be your own boss. This autonomy comes at a cost, however, and it often involves taking on uncomfortable tasks such as chasing up slow-moving debtors when you're owed money.
Invoice consistency is fundamental to maintaining business cash flow and minimising the time wasted chasing outstanding debts. Invoicing smaller amounts regularly will often facilitate speedier client payments.
On the flipside, if you send a client a significant bill after allowing invoices to pile up, it can be a sure-fire way to get them offside. It might even generate cash flow issues for the customer and create a situation where they take longer to pay - or worse, they don't pay at all.
If you find yourself in the situation where there's an overdue invoice, contact the customer quickly, advises Katarina Vencel from Vencel & Co, a Sydney-based accounting firm.
"If you offer payment terms of 30 days, follow the debtors up when payments are seven days overdue," she says. "If the payment terms are shorter than 30 days, chase the late payers earlier than seven days."
A Queensland government website recommends sending a tardy payer a reminder or final notice.
This is helpful advice but when the hustle and bustle of running a business take over, it's easy to overlook reminders. It's worth noting that accounting software provider Xero has added an automated reminder service to its functionality. This means it's now possible to set overdue alerts for seven, 14 and 21 days that are emailed to overdue debtors.
Don't be frightened to jump on the phone to contact slow payers. By talking to them directly you can find out if there is a problem. If there is an issue perhaps you can work out a payment plan. If there is no problem, then ask them to settle the debt by a specific date. Vencel says business owners should use their common sense when contacting debtors.
"You need to know when to chase and it's important not to go too hard or be too aggressive when approaching clients. Every approach should be friendly." Only when the matter drags on should you consider legal action.
Patrick Kaluski, commercial litigation and insolvency partner at legal firm Moray & Agnew, says taking the time to conduct some commercial due diligence on prospective clients can reduce the frequency of unpaid invoices.
If this doesn't help sidestep a recalcitrant debtor, Kaluski recommends a letter of demand notifying the debtor that legal proceedings may be commenced.
"This may persuade the debtor to pay the debt to avoid additional legal costs and interest," says Kaluski.
If legal proceedings are necessary, there are a number of avenues to take to recover the debts, including filing a statement of claim in court or serving a statutory demand.
"A statement of claim can be initiated by a small business owner with the help of a chamber magistrate at court, although most people will instruct a solicitor to prepare and file it," says Kaluski.
If your customer is a corporation rather than an individual, a statutory demand can be served. This process gives the slow-paying customer 21 days to pay the debt. "If the debtor doesn't pay the outstanding amount, they can be wound up by the court," says Kaluski.
The creditor will need to provide a statutory declaration that there is no dispute between the parties about the existence or the amount of the debt before a statutory demand can be served, if no judgement has been obtained.
"The possibility of liquidation often puts pressure on sluggish customers to pay a late invoice."
Finally, small business owners in certain industries, such as building and construction, may be able to take advantage of legislation that seeks to make the debt-recovery process more efficient, says Kaluski.
"Specific advice from a lawyer should be sought in this regard," he adds.
This is a business that tries to recover the money for you for a fee. Using a debt collection service goes one step further than sending a letter of demand because it signals to the debtor that you have decided to hand the matter over to professionals.
This could further strain your business relationship with them but sometimes it may be more important to get the money you are owed. Commission rates for debt collection typically vary between 5% and 30% of the value of the debt.