The following is general information only, not advice. In all cases we recommend that you get specific advice relevant to your circumstances before taking any action.

Protecting Receivables Starts Before The Sale Is Made

Granting credit

Credit Applications
This can be achieved by ensuring you collect and check information about your new customer, before granting credit. Have them complete a credit application form, make sure they include trade references and check them all out. The form will also provide verifiable information about the legal identity of the customer, the ABN and the contact details.

Personal Guarantees
If the customer is a company, you may wish to also include personal guarantees from the directors or shareholders which holds them personally responsible for the debts.

Other conditions
Your credit application may set an initial credit limit, or provide for an initial period during which the customer must pay cash. Where physical goods are being sold, your credit application form may also legally reserve your ownership of the goods until they are paid for in full, even if already delivered to the customer. Other clauses in your contract may deal with charges for late payment, or the applicability of discounts for early settlement.

It's a legal contract
Above all, treat the credit application process as a contract negotiation (which it is), and get appropriate professional advice to make sure it is legally sound, and adequately protects your interests.

Credit Application examples
A number of Credit Application formats can be easily found by Googling. However a note of caution: The vast majority of these samples and examples will either NOT reflect Australian laws and conditions, or alternatively only will apply to a specific company.

Nevertheless it's useful to see some examples for terms and conditions which might be applicable to your circumstances. Some Australian examples can be found here.

Receivables control and monitoring

Being up to date also means that invoicing is done immediately after the sale, or even in advance if circumstances permit. This enables you to follow up for collection at the earliest possible time. Where possible, consider getting deposits in advance of delivery, to bolster cash flow and limit the downside impact when things go wrong.

Regular reviews
Regularly review up-to-date debtor lists, so that stragglers are caught early and followed up as soon as (i.e. not after) their payment becomes late. Where appropriate contact a debtor the day before a payment is due to ensure payment is being actioned - this sends a powerful message that you expect trade terms to be honoured. If your terms are 14 days, ring on day 13. Work on the assumption that "the older the debt, the harder it is to collect" (usually true).

Early detection of the signs of trouble
The current economic climate makes it important to pick up adverse industry or individual customer trends as early as possible. As always, communication is important. When a debtor's liquidity starts to slide backwards, he won't always ring you for a friendly chat, so it's up to you to be alert to any changes in position. Keep a watchful eye on business news and industry data.

The hidden costs of running a debtors ledger
Where your credit terms are habitually not honoured, the cost of your administrative supervision should form part of your next price negotiation with the customer.

Often the full costs are not easily identified from regular financial statements, and further analysis is necessary. This information is important, because by coupling true costs with a probability estimate of collections, you have an objective basis for deciding credit limits.

Try this exercise:
Calculate the true costs of running your debtors ledger by totalling the people costs, and other costs such as postage, stationery, floor space (rent), equipment, loan interest (on the value of debtors), telephone, bad debts, bookkeeping etc, and then apportion the costs over segments of your debtors ledger. The results may surprise you - and give you some ammunition to re-negotiate the trading terms of the more costly debtor segments or categories.

This kind of analysis can also lead you to review a number of important strategic questions, such as your target market and its trends, and the opportunity costs associated with the capital tied up in receivables.

Embed control of credit in your systems
Formal procedures should be established between your business's sales and delivery functions to ensure that delinquent customers are automatically flagged, and have their access to further credit limited. Many accounting software systems enable this to be done fairly easily.

Debt Collection

Nevertheless, once an account has broken out of agreed credit terms, the supervision costs will rapidly escalate and can seriously erode margins. It is therefore important, that in working out a collections procedure, limits are put in place, so that small troublesome accounts can be simply written off, rather than committing time and resources on a potentially low-yielding collections process. The level of such limits will depend on a business's trading position.

Establish an escalating debt collection action sequence
An automatic procedure for dealing with out-of-terms debtors is essential. Within your written credit policy, establish a hierarchy of actions which escalate in tone and degree of seriousness. The hierarchy can be supported with standard scripts (for telephone contacts), and standard letters, the procedures for which can be easily delegated. The details of all debtor contacts should be recorded.

An example of an escalating action sequence might be as follows:

Step 1: Friendly letter
Step 2: Blunt letter
Step 3: Telephone call
Step 4: Letter of demand
Step 5: Legal Process with negotiated settlement
Step 6: Legal Process with court action e.g. writ of execution

The action steps sequence should reflect your business model, and of course whatever produces good results in your circumstances. For example in many cases a friendly phone call might be the first step. In other cases that would be too expensive.

Written records
Whatever the course or sequence, an accurate record of every debtor contact should be kept, noting the date, time, person spoken to and what was said.

In each contact, the debtor should be:

• given clear timelines within which to act
• told what the next step will be if they don't comply

In all cases, prompt action on the deadline signals that you have serious intentions.

Out-sourcing?
Debt collectors can be engaged at virtually any stage short of legal process. Whether you do so depends on whether you have sufficient time and skills available to run the process in-house, and the cost/benefit by comparison to an experienced debt collector, who is paid by a fixed fee plus commission, or perhaps just a flat commission.

Whether out-sourced or not, keep in mind that there are laws which prevent unreasonable behaviour and harrassment by businesses collecting debts. More here.

Using a lawyer
The extent to which lawyers are directly required will depend on the amount involved, and the level of legal process. Regardless of that, legal advice is always highly recommended. Here is a useful summary of the legal options in Western Australia.

Go here for a sample Letter of Demand