PKF Francis Aickin Limited, Far North, New Zealand
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Audit & Assurance Services
30 Apr 2015
For many businesses, getting sales can be a hard won challenge, but getting paid for them can be something else again. Whilst most customers pay regularly and on time, there will always be a number who can't, won't, or don't.
The cost of a non paying customer can be a considerable drain on the resources of a business. The investment required to finance a sale of any kind, whether it be from a business that sells goods or services, is considerable. If we consider that typically the profit element in most business sales will be less than, and sometimes a lot less than 10% of the sale itself that means that for an invoice of say $1,000, the business may well have paid out over $900 plus GST, to finance the sale, before receiving payment for it.
If there is a long delay in receiving payment, where's the cash going to come from to finance the cost of the unpaid sale? There's generally only three places that cash can come from: retained profits, capital injected by the owners, or borrowings. Borrowings will come with interest attached, or from other suppliers. In other words, you pay interest to the bank which erodes the profit on the sale itself, or you don't pay your own suppliers.
This latter "source" of finance is very damaging to the business world. Unarranged supplier credit robs the business world of the ability to pay each other on time. The flow of working capital by way of invoice payments is like the lubricants that an engine relies on to keep functioning. Without it, the machine will grind to a halt. If only all of our customers paid us all on time, we could all pay our suppliers on time, and they could pay their suppliers on time, and so on. I'm sure that you can all get the picture.
So how do we all pay / get paid on time? Efficient debt collection can be boiled down into simple stages that start before the sale is even made.
Step one is to ensure that the terms of the sale are clear, and the price is agreed between buyer and seller. Where possible this should be recorded in writing. It's at this stage that, if the customer envisages not being able to comply with the supplying business's payment terms, alternative arrangements should be agreed. Don't wait until after due date to try and deal with the problem!
Step two is for the supplying business to supply what was agreed to. If the nature or extent of the job changes part way through, the supplier needs to be communicating that.
Step three is for the customer to pay on the day that was agreed to. The day is important. If I am paying you, you'll be wanting to pay your suppliers, which often will be the same day you're expecting me to pay you - eg the 20th of the month. If I let you down, you may have to let your supplier down, and they'll have to let their supplier down and it goes on an on.
Step four is what to do when your customer doesn't pay you on the agreed date. Be prompt in contacting your customer to make it known that you expect and need to be paid as agreed. Don't wait until next month. All that does is to train your customers that they can pay you when it suits them. Try paying your bank, power supplier, or phone company in a month or so and see what they do?
I am amused by those little 30 day, 60 day, 90 day boxes that appear on generic statements. It's as if you are telling your customers that they are free to choose what box they'll opt for to pay you!
Step five is what happens when your customer fails you. Be prompt in communicating, and agreeing alternative arrangements, and be consistent in your follow up. The message needs to be clear, that you expect to be paid as agreed. Consider including a reasonable automatic interest charge when establishing your terms of credit with your customers.
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