How To Prevent Client Debt
Are your clients not paying on time? Overdue debts can cause serious cash flow problems within your business so it’s important to make sure you have a good process in place for getting paid. We’ve previously shared tips on recovering debt but if you have a good system in place you can prevent customers from owing you overdue money in the first place. Remember, prevention is better than collection!
Here are ways to prevent client debt:
CHOOSE YOUR CLIENTS CAREFULLY
You should know exactly who you’re getting into business with! It’s easy to get trapped in the cycle of taking on any client you can get in order to win business, thinking it will lead to profits. But if they are the wrong client, it can cause loss of money, time and sanity! Create a profile of the perfect client you’d love to work with and then only take on people who meet those expectations. Before you do business with them, do your research! Check their websites and social media sites. You can even ring their clients and ask them about their experience.
CLEARLY OUTLINE EXPECTATIONS FROM THE GET-GO
It’s important to clearly outline your expected terms of trade and payment at the beginning of your working relationship. This way the client knows exactly what is expected of them, and it helps you enforce this later down the track. You should also always work with a signed contract so that you have a legal document to refer back to. The contract should include:
Terms of trade
Payment details
Any additional charges for overdue payments
Debt collection procedures
MAKE UPFRONT PAYMENTS YOUR POLICY
Taking partial upfront payments can reduce the risk of not getting paid. You can take this one step further and present a payment schedule upon commencement of the agreement. For example, 25% upfront, 25% at a key point in the project and 50% on completion.This reduces the amount owing at the end of the work, meaning that even if your client should fail to pay the final instalment, you have recouped the majority of costs. Asking a client to pay by milestone instalments is especially helpful for smaller businesses that rely on regular cash flow.If you work ongoing for clients, it’s best to set up weekly or fortnightly payments. If the client stops paying, so does the work you do for them!
INVOICE CLIENTS EFFICIENTLY
You need to make it as easy as possible for your clients to pay. Your invoice should be simple and easy to digest, and you should send it out on time/ on a regular date. Your invoice should also include:
Your details (name, company name, address, ABN/ACN, contact details)
Invoice details (invoice number, client name/details, date of invoice, due date)
Tables (date or quantity column, description, unit price or hours, GST if required, total)
Using accounting software such as Xero allows you to automate the process so that you never forget to invoice your clients on time.
STAY IN TOUCH
Make sure you’re keeping in regular touch with your clients in order to develop good communication and understanding. Maintaining positive relationships with clients can prevent issues from arising and will allow for clear communication should the client know that they may not be able to continue paying.
At Iron Advisory, we help ambitious business owners become more profitable and create the lifestyle of their dreams! Not only are we qualified accountants and advisers, but fellow business owners. We’ve built our consulting practice and gym wear brand from inception to a 6 figure turnover, and we want to help you do the same. You can book a free and no-obligation consultation with us here.
**The contents do not constitute legal advice, are not intended to be a substitute for legal advice, and should not be relied upon as such. You should seek legal advice or other professional advice in relation to any particular matters you or your organisation may have.