Financial management

Careful management of your finances means your business can work more effectively, be sustainable, and grow. Successfully managing your finances (including your cash flow and debtors) means you always have enough to pay your creditors and also have enough profits to put back into your business.

Credit policy

Credit is providing goods or services before getting paid for them. The time taken to invoice and receive payment can impact on your cash-flow and become a problem.

The simplest way to avoid delayed payment is to insist on payment on or before delivery of the goods or services. However, some businesses need to provide credit to some of their customers.

Successful collection depends on having a policy for credit and collections. There are three basic goals:

  • obtain payment in accordance with credit terms
  • maintain customer goodwill
  • keep credit losses to a minimum.

A workable credit policy should:

  • establish written guidelines for granting credit
  • set out the terms and conditions for credit, eg how long customers have to pay their accounts and penalties that apply for late payment
  • outline processes and procedures to follow when payments are overdue
  • guide those involved with the credit function on what to do, when to do it and how to do it.

Get payment in full as quickly as possible because the cost of collecting an account increases every day. Each time an account is handled, there are administrative costs, collection costs and overheads, and these continue until the account is eventually paid or written off.

Ensure your customers know your payment terms, monitor credit accounts closely, and persist in follow-up action until payment is received or you conclude that nothing more can be gained by continuing.

Debtors and overdue accounts

Extending credit to customers may help you gain more sales and revenue in the long-term but it becomes a significant cost to your business if you do not control that credit effectively. If you provide credit to customers they become your debtors. They may pay slowly or not at all, leaving you to manage a revenue and cash-flow problem.

Signs that a customer account may be becoming a risk include:

  • accounts only partially paid each month
  • late payments
  • payments rounded off each month
  • purchases beyond normal levels
  • cheque not signed (delay tactic)
  • mistakes with date or amount of cheque (delay tactic).

Establish a credit policy for your business that is appropriate and realistic for your industry and make sure your debtors understand the terms of doing business with you.

Implement a fair but firm collection procedure, eg putting collection stickers on overdue accounts, sending collection letters, making personal contact (phone calls or emails) and, ultimately, legal action.

Legal recovery

Legal action should be considered as a last resort. It may be directed through a debt collection agency or a legal firm.

Before starting legal action, evaluate:

  • whether the debtor is still trading or able to be located
  • how rigorous the collection process has been so far
  • the quality of documentation held
  • the size of debt
  • the debtor's reputation and whether personal guarantees are held
  • the debtor's financial strength and whether security is held
  • the existence of any unsatisfied court judgments
  • the legal costs, particularly if the action failed.

Debt Collection - Australian Competition and Consumer Commission

Related information

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Page last updated 21 December 2016

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