As we’re sure you know, cash flow is crucial in your business. If payments aren’t coming in on time, you won’t have enough money on hand to keep up with your overheads.
So when you provide a service and the client doesn’t pay on time, it’s natural to feel irritated – in fact, many would say you have the right to.
When it comes to the act of actually collecting those debts however, many small business owners struggle.
Unsure how to go about collecting overdue debts?
Today, our small business accountants in Melbourne explain the do’s and don’ts of debt collection – in particular:
- How you can keep track of payments
- How to best approach the task of following up overdue payments
- Your legal rights and limitations when it comes to debt collection
Small business accountant
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What’s the best way to ask for a payment?
Get everything in writing
Make sure that all your payment terms are in writing. This gives you an undisputable record of payment terms, as well as a record of any changes your debtor may have negotiated.
Our small business accountants have seen far too many cases where two parties agree to one thing in a “handshake” or verbal deal.
Without any written proof that the agreement took place, it quickly turns into a “he said, she said” situation.
Having tangible proof of what’s owed can motivate some debtors to meet their obligations.
Additionally, you’ll have proof that a debtor is breaking the terms of your transaction should you find yourself in a legal battle.
In addition to using formal invoices, we suggest communicating any changes to payment terms (such as extensions) via email.
Not all overdue payments are the result of malicious intent – in many cases, it could be the result of an unexpected financial issue, or a sudden influx of liabilities, all of which need to be paid off.
Like many things, there’s equal amounts of give and take when it comes to collecting debts. If the client has a long history of on-time payments, sit down with them and figure out a plan.
For example, you may agree to extend the payment date, or accept installments instead of an up-front payment. You may even decide to settle for slightly less, if it’s a customer you want to keep.
Be firm, but not aggressive
It’s important to be firm with clients – act too much like a pushover, and many less scrupulous debtors will use this as an opportunity to push what they can get away with.
Be firm. Make it clear that you’re in the right, and that you’re serious about collecting the money that’s owed to you.
However, it’s just as important that you aren’t too aggressive.
Coming in too strongly will simply make debtors more defensive, and therefore less likely to cooperate with you. When collecting payments, keep your cool.
Your legal rights: what can and can’t you do?
From a legal standpoint, you’re completely in the right to pursue overdue payments.
A service has been rendered after all, and you haven’t received the agreed-upon payment.
However, there are certain things you can’t do.
According to Victorian law, there are strict limitations on what you can and can’t do when chasing up money that’s owed to you.
Here’s a full list of debt collection practices that are banned in Victoria. Some of the highlights include…
Don’t: publicly shame
You might think it’ll feel good… however, it’s something we strongly advise against.
Not only is this good policy from a customer service standpoint – it can also protect you from legal repercussions too.
According to Victorian law, it’s illegal to publicly disclose debt information without the debtor’s consent. The only exceptions are those with a legitimate interest in the information like employees, or your small business accountant.
That means putting your debtors on blast on social media is something you’ll want to avoid.
Don’t: contact debtors who don’t want to be contacted
When it comes to debt, it can be tempting to call your debtors over and over until they come back with what’s owed to you.
Be warned however: if the debtor advises in writing that they no longer want to be contacted, you’ll have to back off.
There are only a handful of exceptions to this:
- You’re launching legal action against the debtor
- Communication relates to an ongoing court procedure or VCAT hearing
- The overdue amount is regulated by the National Credit Code
Additionally, debtors may also specify the time and method for communication.
For example, a debtor may advise that they are only to be contacted via a lawyer or solely during after-work hours. Unless there’s no other option, these wishes should be respected.
Failure to follow either of these types of requests may result in your communications being classified as harassment.
Don’t: engage in illegal behaviour
Threats. Misleading statements. Claiming payment that you aren’t legally entitled to.
Each of these are strictly illegal, and have no place in your debt collection system!
Keeping track of your debts
Collecting debts isn’t the only problem when it comes to collecting overdue payments – there’s also the issue of tracking what’s owed to you.
In many cases, small business owners may simply lose track of overdue payments, negatively affecting their cash flow going forward.
This cuts the other way, too – some small businesses may also lose track of what they owe to others!
We suggest taking a look at your filing and documentation systems – our small business accountants in Melbourne can get you set up with a range of easy-to-use and intuitive software packages, including Xero, MYOB and Reckon.
In addition to helping organise your financials, these packages also send out automated reminders to both yourself and the client, protecting your business cash flow.
Another way to keep track of your debts is with an audit.
During an audit, your small business accountant will take a deep dive into your finances, uncovering any errors, missed transactions or overdue payments.
Talk to our small business accountants in Melbourne
If you need help with your accounting, Bruce Edmunds & Associates are the team to call.
Since 1966, we’ve been helping small business owners all over Melbourne get their finances in order.
Whether it’s help with your small business tax returns, cash flow forecasting, auditing or advice about the feasibility of your business growth strategy, our team of small business accountants are working for your success.