10 Things Companies Need to Implement to Avoid Bad Debts and Cash Flow Constraints

In a perfect landscape, the majority of clients and customers would settle their invoices within the stipulated trade terms, however, very few businesses ever pay on time.

In this article we will assess the late payment culture in South Africa and  the specific strategies that ought to be deployed to minimise and reduce these risks, which could threaten the survival of your business.

Late settlement has an enormous impact on companies especially SMEs, whose bottom line and cash flow is adversely affected by late settlements.  

Research by Xero found that during 2019, 91% of SMEs were owed money outside their payment terms, on average 18 days late in any month. For companies of less than 10 employees, the average quantum outstanding was R93,000, and for companies with 100-250 employees it was almost R114,000. This equated to a staggering R249.5 billion nationally.

The survey found financial services and automotive sectors were worst at paying on time.

A study by another software solutions company, Sage, conducted three years ago, found that SA SMEs lose about 20 days in chasing payments — compared with an average of four days in Australia.

Not only is this an enormous drain on resources, but it can severely impede cash flow – making or breaking a business. When it comes to outstanding invoices, prevention is always better than cure, so it’s crucial that companies adopt systems and implement processes to protect your business.

So, what are some of the safeguards that can be implemented to protect your business’ future?

1. Implement a proper written agreement. Make sure your terms of trade includes all relevant clauses which minimise the potential of a dispute.  Each agreement is unique and it is important that you obtain independent legal advice when drafting and entering in to a credit agreement.

2. Have your customers sign the agreement before extending credit terms. Many companies supply goods and services on the basis of oral agreements. Unfortunately this means that disputes often arise that could have been avoided if there had been clear, written terms of trade from the start.  

3. Do credit checks, prior to the conclusion of the agreement and after.  There are benefits to being picky.   Sound credit vetting means your business reduces its exposure to bad debt and bad payers. It also provides you with the insight required to identify and address risk, appropriate credit limits and trading terms.  Trade information such as credit checks, will reveal whether a potential customer has a poor payment history, judgment and other relevant information to assist in assessing a prospective customer.  It is important to also conduct annual checks on existing customers to ensure that they are in a position to continue meeting their obligations in respect of an existing facility.

4. Set safe credit limits. Instruct employees to notify management if a customer wishes to exceed an agreed limit. Requests for additional credit ought to be requested and approved in writing with clear payment conditions.

5. Clarify your customers payment procedures and policies.   It is important that a customer verifies the details of the relevant employee who invoices are to be transmitted to, what the customers payments procedures entail and whether there are any other policies which may effect the timeous settlement of an invoice.

6. Improve your invoice management.  Creating invoices manually can often lead to mistakes which then leads to delayed payments. Furthermore, sending paper invoices instead of electronic ones requires a lot of time and effort which is another reason why businesses turn to automating their invoice processing. The faster you invoice, the faster you'll get paid.   Sending out invoices as soon as a job is complete, means that you’re less likely to miss your customers next payment cycle.

7. Scrutinize the accounts receivable and age analysis.  Preparing the accounts receivable report regularly allows you to identity the average age of receivables and potential losses from customers.  If there are several customers with overdue amounts that extend beyond 60 days, it may signal the need to tighten the credit policy towards the existing and new clients.

8. Implement an effective follow-up process.  When payments are late, how you respond impacts your chances of getting paid, and your policy sets the road map. When you follow your own guidelines for collecting past-due amounts, your clients accept that you are not likely to let overdue accounts slip.  This process should include an initial reminder and several follow ups, ranging from a friendly reminder to a formal letter of demand.  Companies should also implement a plan for levels of escalation within specific time frames.

9. Judge each case on its own merits. That might involve allowing a debtor an extra month to pay their invoice while they work through cash flow problems.  

10. Know when to hand over a customer.  Every now and then a delayed payment will escalate in to a debt recovery situation, and in that instance companies should weight up how much is owed, the cost and time it will take a company to follow up, and whether the business you are chasing has the ability to pay the debt. In some cases, it might be better to write off small amounts to preserve your business relationship.  If a customer simply refuses to pay or doesn’t return calls, legal action should be considered.