It won’t surprise you to know that cash flow is an integral part of any business and its survival, particularly for small businesses.  The Australian Bureau of Statistics reports that 60% of small business fail in the first three years.  And 40% of these are failures are as a result of inadequate cash flow.  A major contributor to that statistic is poor debtor control and the need for small business advice.

As an accountant, business coach and business mentor, part of my role in providing small businesses with advice.  To help clients balance the cash flow tightrope by working with them to create and implement strategies specific to their business.

Today, I’m going to share with you some tips on how to improve the debtor collections that will significantly assist you to improve your business cash flow.  And create greater balance in your business.

Control Client Credit

One of the most valuable business mentor secrets I can share with you is knowing how and when to approve credit for a customer.  This is of utmost importance to understand how to increase cash flow for your business.

The following few simple, yet strict guidelines will help avoid a bad cash flow situation.

The best credit policies start with a written application for credit or letter of engagement.

Firstly, your credit application form needs to show the correct legal name of the customer and their Australian Business Number (ABN).  You should verify the ABN provided by checking the details using the Australian Business Register lookup tool at

Equally important is to get the correct physical location and postal address for sending invoices and notices.

Make sure to also include the following:
  • What goods or services you are agreeing to provide and the credit limit that you are prepared to grant
  • State clearly what your expected payment terms are
  • And that interest penalties will be applied to overdue amounts, and at what interest rate
  • That any debt collection charges incurred will be added to the debt

It’s important to your business and your client that your credit application is detailed and thorough.

The last step to a good credit application is, if possible, to get a personal guarantee.  Some potential customers may baulk at signing this.  If that’s the case, you need to decide if you are still willing to provide credit to this person.  Without the proper terms, you have very little leverage to enforce collectability.

Sadly, I have seen too many bad debts incurred through poorly written or non-existent terms and conditions.  Your terms and conditions are NOT something you should attempt to write yourself or copy from somewhere else.  Besides any potential copyright issues, you will never know if what you are copying was properly worded to make it enforceable.  Get proper advice from a good commercial lawyer if you want to have any hope of effectively collecting your overdue invoices.

When it comes to approving the credit, be sure to ask for references from other suppliers and call them to get answers to the following questions:
  • What is the normal monthly spend?
  • When was the last sale?
  • How long have they been a customer?
  • Is the account currently operating within their trading terms?
  • Is it regularly maintained within the credit terms?
  • If not, when do they usually pay – 30 days after the due date? 45 days…?

To determine the customer’s reliability, the best small business advice I can give is to recommend you also include the following:

  • Contact details for at least three supplier referees
  • A signature of acceptance confirming that they have read and understood your terms and conditions and agree to abide by them
  • Permission to conduct a credit check

Provide plenty of payment options

Two of the most important ways your business can increase cash flow is to ensure you invoice your client immediately upon delivery of goods/services and to provide multiple payment options such as:

  • Credit Card (including AMEX)
  • PayPal
  • Direct Debit

These options increase the likelihood of receiving payment promptly and will reduce the need for having to introduce debt collection strategies.

Develop a Collection Schedule – and stick to it!

The best way to avoid overdue debts is to develop a collection schedule. Then use it religiously.

Your collection schedule could be something like this:

  1. Send a reminder notice within 2-3 days of the invoice being going past the due date.
  2. If the debt becomes more than 10 days overdue, send a more strongly worded request.  Remind them of their signed agreement to pay your invoice within agreed terms.
  3. If still no response, make a phone call.  Do not cop out on this step and send another email.  Make the call and have the conversation as there may be valid reasons why your invoice hasn’t been paid.  Resolve any concerns if there are any but importantly, get a verbal commitment from your customer to pay.  Ensure the customer understands that not honouring this commitment will result in the debt having interest added and being referred to a collection agency.
  4. If the commitment to pay isn’t honoured, then I suggest one last effort using a FINAL WARNING letter.  Ensure to give a specific date when the debt will be referred to a collection agency if the debt is not paid.
  5. If all the above have failed, you must follow through on the threat to refer to a collection agency.  Not doing so destroys your credibility and ensures your customer will continue to delay paying your invoices going forward.
For debts of less than $10,000, an alternative to using a collection agency is to lodge a minor case claim in the Magistrates Court.

The process is fairly straight forward and can be done online at

Perhaps you’re wondering where does the sending monthly statements fit into this process?  In my view, sending a statement at the end of each month does nothing for collection efforts.  And those colourful little stickers “Friendly Reminder” etc. are also a waste of time.  You need to be proactive and consistent in your efforts to collect monies owed to you.  The saying “the squeaky wheel gets the grease” is certainly true where the collection of debts is concerned.

With these strategies in place your business will have better cash flow in no time and your days of walking a tightrope… will be in the past.

Want to find out more small business advice and gain a little bit of extra help to boost your business cash flow?  Contact proCFO to find out more about our Business Growth Guidance services today.

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