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Five steps to make sure that you get paid print Print

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Good credit management starts with your own systems. The best way to ensure that you get paid promptly is to ensure you have good systems in place that increase the cashflow into your business and minimize the risks of not getting paid. These five steps will help you strengthen your cashflow and eliminate many debt problems before they occur.

When it comes to the task of chasing debtors for money owed to your business, prevention is far better than cure. In other words, do everything possible first to make sure that your invoices are paid on time and you will eliminate many later problems.

Here are five steps to help you:


1. To get good results, follow sound procedures

Establishing clear rules, systems and procedures at the start is the best way to make sure that you avoid problems later.

Avoid offering credit

Work at reducing the number of credit accounts you offer. If possible, avoid extending credit at all. Try to get payment straight away - you thereby eliminate all subsequent credit problems. Many inexperienced business owners lack the confidence to ask for settlement straight away, but if you're trading with individuals rather than businesses, try encouraging payment with the goods or when the work is finished. For example, trades people should ask their customer "Are you happy with the job?" and when they say "Yes", produce the invoice. The customer's natural reaction to you writing an invoice is to reach for their wallet or chequebook.

Even if you're dealing with commercial firms, try to offer credit only to regular customers who have a proven record of paying on time. The results will improve your cashflow and minimise the unproductive and unpleasant aspects of chasing debtors.

Accept credit card payments

Accepting credit cards is a way of allowing your customers to opt for a credit option while leaving the risk with the Bank. For more information on accepting credit card transactions ask an ANZ Business Specialist.

Be choosy in extending credit

Many debtor problems arise because credit has been unwisely extended to unsuitable individuals or businesses. New businesses in particular are typically eager to gain sales, and feel awkward about putting customers through a credit application process. Credit is often automatically given to all comers, or extended on the judgement of the owner or manager without proper checks. This is a recipe for debt problems.

Although there is always an element of judgement involved in extending credit (clearly some larger or well-established businesses do not need to go through the credit check process), the process should be applied to the majority of businesses wanting credit.

Check creditworthiness

Where circumstances dictate that you should provide credit, the customer should complete a standard credit application form - so you know exactly with whom you are dealing.

This is the time to discuss and agree on your credit terms with the customer, so that both parties are aware of when payment is expected.

If you don't have such a form, ask one of your suppliers if you can use their form as a guide, or get a free sample from a local debt collection agency. Ask your lawyer and your accountant to review the form you choose; they will likely be able to suggest improvements.

  • The form should also include your terms of trade. Key points to consider:
  • A provision for interest payments on overdue amounts
  • A provision to add collection costs on accounts you have to refer for collection
  • A reservation of title clause if you sell uniquely identifiable products
  • A personal guarantee from a director (if you're dealing with a limited liability company, and if you're offering a significant level of credit).

If the customer refuses any of these, it is your business decision whether to take the risk of supplying on credit.

Check credit referees to make sure the individual or business has paid promptly in past dealings with other businesses.

If in any doubt, ask a credit agency for a credit check on a prospective business or person. Consult the Credit Advice Services section of the Yellow Pages for details of other companies offering this service.


2. Create efficient systems

Without an efficient system for invoicing customers or clients, and for following up on slow payers, a business is heading for debt collection problems.

Be efficient and prompt at invoicing

Customers will not pay until they have been invoiced, because the invoice provides a record of the transaction they need for their accounting.

A common failing in new businesses is to imagine that the sale is everything (or certainly the most exciting part) and that invoicing can be done later - often much later. The sooner you invoice customers, the sooner you can get paid. It really is as simple as that.

There is no rule that states invoicing should be left until the end of the month. Instead, complete invoices as sales are made and post them off promptly.

Use e-commerce if possible

If you can, email invoices to customers. This is an even speedier way of getting the invoice to them than the post, and the sooner the invoice is receiving attention, the sooner you are likely to get paid. Emailed invoices also save on postage and stationery, and make sending reminders fast and easy.

Set shorter terms

Many people seem to think that 'payment by the 20th of the month following invoice date' is a tradition that has to be followed. It is not.

Change your payment terms for new customers to: 'Terms: payment within 7 days' and you are well on the way to improving your cashflow. For your existing customers you can phase in the new terms (for example, announce the change will take place at the start of the next financial year).

Some (usually larger) companies will insist on the familiar 20th of the month, but many others will pay more promptly.

Again, the time to clarify your terms with customers is when you first extend them credit. Simply ask: "We require payment within 7 days of the invoice date. Will that suit you?"

Eliminate statements if possible

End of month statements simply sum up what the customer owes. This extra administrative step costs time and money, so why not eliminate it if possible?

You can do this in many cases by stating at the bottom of all your invoices in bold: 'Please pay on this invoice as no statement will be sent'.

Some customers - again, typically larger ones who receive multiple invoices from you - will insist on end of month statements, but many others will happily pay against an invoice. More importantly, you'll get your money more quickly as people won't be waiting for a statement to arrive.

If you do have to send statements, avoid the layout common to many statements that shows how long payments have been outstanding: 30 days - 60 days - 90 days - Total.

This layout simply encourages habitually tardy payers by signaling that you are prepared to wait up to 90 days for payment - after all, it's on the statement! Remember that some businesses will be only too happy to use your business as a free source of finance if they feel they can get away with it.

Don't give them any encouragement in this regard whatsoever. A better layout omits the time spans, for example:

Current - Overdue - Total

If necessary, you can point out by how long the amount is overdue when you follow up such an overdue account.


3. Get on to problems early

Follow up unpaid invoices promptly

Once you have put in place an efficient invoicing system, don't waste the momentum by not following up overdue invoices promptly.

It is all too easy to neglect this task, because few people really enjoy chasing up people for money. Here's what should convince you: the longer you leave an unpaid invoice, the less likely your chances of getting paid.

Stick to your terms of payment

There is no point in setting out terms of payment and then not sticking to them. Tardy payers will soon work out that you don't mean what you say and will react accordingly. Be firm but fair.

If people have accepted your credit terms, then you have a right to expect payment on time, and you are entitled to contact them if this does not happen. Most people are honest and will pay on time.

But for the late payers it's important to get on top of the problem early. Remember that the age of the account is critical.

The advantage of requiring payment within 7 days is that you can send out three reminders within the first month.

By contrast, 'payment by the 20th of the month following invoice date' means you might only be aware of a problem up to 50 days after your first sale of goods or services. In the meantime, the customer might have bought more goods or supplies from you, adding to the debt problem.

Review all your credit accounts regularly and telephone those who have not paid within the agreed period. The earlier you start your credit control, the more relaxed you can make your initial contact.

Cut off credit if necessary

Adopt a consistent 'stop credit' policy of refusing to supply customers who are seriously overdue, and have not responded to your follow-up (for example, 60 days overdue). Ask the customer to settle the outstanding debt first before you supply more goods and services. This policy acts as a discipline both for you and the customer and limits any further losses.


4. Set debt reduction targets

Age your debtors regularly and set reduction targets. For example, if the average age of your debtors' ledger is 55 days, set a target of reducing this to 40 days. (Ask your accountant or ANZ Business Specialist for help if you're uncertain how to work out the average age of your debtors.)

Your accountant may have a benchmark figure you can use to measure your business against others. For example, if the average for your industry is 40 days but your business takes an average of 47 days to collect debts, your business is less efficient than the industry norm, and there is room for improvement.

The faster you collect debt, the better your cashflow situation will be (and the more attractive your business is to a potential buyer, if you wish to sell it at some stage).


5. Avoid these common traps

Finally, be aware of these traps for the unwary.

Beware of large orders

You may be delighted to get that large order, but what happens if you commit significant resources to fulfilling it and payment is delayed - or you end up not getting paid at all? At least make sure you've checked creditworthiness and received guarantees. If possible ask for a deposit or arrange for progress payments - these steps will both improve your cashflow and reduce your exposure.

Danger of the single customer

It is better to spread your risk over 10 smaller customers or clients than be dependent on one large customer for your business. If your business is dependent on one customer (or just a few customers), make customer diversification a top priority.

The new business target

If you are a new business, be aware that you could be a target for people who have exhausted their credit (and credibility) elsewhere. Limit your risk by following the procedures outlined in this guide. Joining networks, your local industry group, chamber of commerce or the Employers and Manufacturers Association (ask an ANZ Business Specialist for further details) will also help keep you in touch with what is happening in the business community.


Further information:

To talk to an ANZ Business Specialist:
Call 0800 269 249
Visit your nearest ANZ branch


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