RSM Australia

How to avoid debt collection with smart business practices

Hindsight can be wonderful in most areas of life, but not when it comes to being owed money by a person or business. When you find yourself in a sticky situation with a debtor, it’s not fun to have to look back and wonder, “How could we have avoided this?

Regardless of whether you’re owed $500 or $50,000, the process of chasing overdue invoices is stress you could probably live without. And with that in mind, the best way to avoid the need for hindsight is with foresight.

By implementing smart business practices, you may be able to reduce your risks and limit the need for formal debt collection.


You can imagine these business practices like dominos. If you place them strategically, they will stand on their own and could prevent outstanding invoice debt from impacting on your business…

Domino 1: Secure a deposit

Does your business require new customers to pay an upfront amount before you provide them a product or service? 4.png

This may not always be possible, but asking customers to pay a 30% or 50% deposit before you commence work is a valuable strategy for lowering risk. If the customer has trouble making the upfront payment, it’s reasonable to expect that they may have trouble paying the final amount after the work is complete.

Consider building deposits into your standard business terms, and only let it slide when you’re willing to wear 100% of the risk.


Domino 2: Offer realistic invoicing terms

Businesses need healthy cash flow to pay for staff, stock, tax obligations, and more.

If your invoicing terms are 30 days and you need to pay outgoings well before then, you may find yourself struggling to make ends meet while waiting for a few large invoices to fall due.

Consider setting invoice terms that meet the unique needs of your business. For some, this may be 30 days – for others, it may be seven days. But by building realistic invoicing terms into your standard business practices, you can improve your cash flow and create room to move when a client you know and trust needs a little extra time.


Domino 3: Have a debt collection policy

A debt collection policy means you know what steps to take and at what time to avoid an invoice becoming severely overdue.

For example, your debt collection policy may state that you call to confirm payment will be made on time two days before an invoice is due, and send invoice reminders:asset_34.png

  • On the due date
  • A week after an invoice was due
  • Two weeks after an invoice was due

Your policy may set out the words you use when you send a reminder, and at what stage you decide to engage a debt collector.

The policy should keep you accountable, and may help you avoid regret for not having urged a client to pay their invoice closer to the due date.

Most accounting software systems also have automatic reminder features, which you can set up to do a lot of the hard work for you.


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Domino 4: Let everyone know your policy 

A debt collection policy is only useful if it’s shared with those it affects. This may include staff responsible for invoicing and accounts, as well as your bookkeeper.

To some extent, it may also include your clients. For example, you may explain parts of your debt collection policy in your Terms and Conditions, so clients are well aware of the actions you will take if their invoice goes unpaid.


Domino 5: Do your due diligence

Lastly, depending on your industry you may choose to implement a policy on how you conduct due diligence before working with certain clients.

This could include:

  • agreements for high-risk businesses that hold directors personally liable for outstanding amounts
  • running a credit check
  • asking people in your networks about the company

Keeping up-to-date with external factors – such as the economy, lending, and pressure on certain industries – may also help you make informed decisions before you agree to provide valuable products or services to new customers or clients.


Don't let the dominos fall...

If you do end up in a predicament, seek the advice of a debt recovery specialist.

A specialist can walk you through your options, and help you determine if a debt is worth pursuing based on the expected time, cost and likelihood of recovery. They can also examine your business practices, and help you implement smart strategies that may reduce the need for debt collection in the future.

To learn more about how RSM can help with debt collection for your business, contact the debt collection team at your local RSM office.