After being caught umbrella-less in a Bendigo downpour recently, I came to value the cover that this small investment provides. After quickly doing the figures of:
- Drenched Bendigo Advertiser — $1.40
- Dry cleaning — $27.00
- Realising I didn’t have time to go home and change before the next function — priceless
Splashing out for a $10.00 umbrella is well and truly worth the money. Not only would the umbrella have kept me dry that day, but it would have kept me dry in all manner of rain and storms in the future. Even if it doesn’t rain tomorrow I’ll still have it for the next day.
The same principle can be applied to debtor management for the small business owner. Outstanding debts owed to a small business can be the difference between survival and failure. Cash flow is the life blood of your business. If you are not getting paid for the work you are doing then why bother doing it?
Keeping an eye on your debts is like watching the weather forecast and a good debtor system is akin to having an umbrella with you at all times.
Debt collection options available to small business owners include; letters of demand, third party debt collectors, VCAT and Court hearings. These options are far more accessible with the right debtor management procedures in place. Having an effective debt management system in place can assist in providing clear evidence as to what work you were required to undertake and for what price. It can also help you avoid the need to use the above mechanisms by identifying bad debtors at an earlier stage.
While effective debtor management is a sensible step in protecting the cash flow of your business it is not a completely water-tight solution to the issue. There is still the potential for a large business to go into liquidation which can leave your business out of pocket. In this scenario the use of the PPSR may be able to offer some assistance (See What's yours is yours, but only if you register it).
A good first step to take in the debt management process is having a look at your billing procedure:
- Do you have verbal quotes or signed contracts?
- Do you bill for big jobs monthly, quarterly, upon completion or as I heard anecdotally recently; when your personal bank account is running low.
- What are the terms of your invoices? Do you expect payment within a week or are you a more lenient operator?
- At what point do you follow up unpaid invoices?
By proactively managing your debtors you can ensure your business is maintaining a healthy cash flow and give yourself the chance to spot the clouds on the horizon before the rain comes. On a final note, it’s always a good idea to carry your umbrella on every job, because even when it looks like a nice day outside you never know when rain is just around the corner.