Managing cashflow is the number one issue facing SME (Small – Medium Enterprises) owners across Australia and one of the key reasons 50% of companies go out of business in the firsts 3 years according to The Invoice Market’s 2017 research report.

According to the report Australia’s 2 million SME’s are struggling with unpaid customer payments with the average Australian business owed more than $38,000 and Many SME business owners admit to using personal funds and savings to fund business cash flow to keep business afloat.

According to the report the 3 top excuses by customers for failing to pay invoices on time are,

  1. 23 % Not processed
  2. 21% Insufficient cash
  3. 17% Lost in the system

According to the report how late are customer payments made compared to payment terms

  1. 1-13 days 37%
  2. 12-30 days 39%
  3. 31-45 days 19%
  4. 46-60 days 6%
  5. 61-90 days 2%
  6. 90 days plus 1%

So how can your business improve cash flow and the management of debtors? By implementing a strong credit management policy.

So, what is credit management policy?

It is a set of procedures which define the terms under which credit is offered to customers to mitigate the risk of loss from extending credit to customers that cannot pay.

Credit management policy –  key components

  1. Credit application

Ensure your business has a strong credit application which as a minimum includes the following

  • Full legal name of applicants (Very important to establish entity responsible for account)
  • the ABN and ACN
  • Registered business address and contact details
  • details of the company’s directors, partners or principals including their full name, address, date of birth and proof of identification
  • contact details for at least three supplier referees
  • Copies of last 3-year financial statements (If trading less than whatever is available)
  • Director guarantees
  • PPSA Personal property security act clause
  • Establish clear terms and conditions of account
  • Include a late payment clause
  • permission to conduct a credit check
  • a signature confirming that they have read and understood your terms and conditions and agree to abide by them


  1. Thoroughly assess customer and trade application

Conduct an accurate overall assessment of customers to which you will be providing credit by conducting the following checks.

  • Verify legal entity on website, use the ABN lookup function to validate details and confirm legal entity.
  • Search ASIC’s registers and databases to verify officeholders/directors
  • Search ASIC Connect and verify if a director is disqualified from managing a company
  • Search Personal Property Securities Register (PPSR).
  • Ring trade references and confirm trading history.
  • Use reputable credit agency to complete credit check on each application
  1. Decide on payment terms

When choosing the right terms, it’s recommended that you choose an option which protects your business’ cash flow.

Payment terms can be

  • 7 days
  • 14 days
  • 21 days
  • 28 days
  • 30 days
  • 60 days
  1. Set credit limit for account

The credit limit you set corresponds to the maximum credit risk that you are willing to take on for that customer. You should consider the following when determining the account limit.

  • Monthly and annual sales
  • Average limit based on trade references
  • If director guarantees are in place
  • Consider a probation period with a smaller credit limit until you assess the customer, once the trail period is over you may increase the limit.

All businesses should have reviewed all customer credit limit at least twice a year as a minimum or as customer buying needs change.

  1. Invoice Promptly

invoicing on a regular basis will help you train your customers to pay on time and maintain a healthy cash flow. Accounting software such as XERO allows you to email tax invoices to customer and you can even set up invoice reminder for overdue amounts on a 7, 14, 21 and 28-day cycle. You should ensure the tax invoice clearly state details of the goods and services, the amount owing, the due date for payment and available payment methods.

  1. Make it easier for your customers to pay

Make it easy for your customers to pay by offering a variety of payment options to customers, the payment options typically used are cash, direct deposit, BPAY, PayPal and credit card.

  1. Have a customer late payment procedure

Ideally you would run an aging debtor report every week.  All overdue customer payments are to be identified and customer notified. Listed below is an example guideline for chasing late payments.

Step 1             7 Days overdue first Contact

Once the payment is overdue phone or email the customer. Remind them that payment is due and has not been received. Ask them when they will be paying you and keep a record of the conversation or email. Remember to be nice, they may have forgotten or paid into the wrong bank account.

STEP 2           14 Days overdue reminder

If they do not respond to the phone call or email, try contacting someone else in the business. Let them know who you are trying to contact.  This often results in a return response from either the person you were trying to contact or someone else from the business.  Make a note of all conversation details on the overdue customer payment record.

STEP 3            21 Days overdue final notice

When a payment is 21 days overdue a final notice is to be sent either by phone or email.  A record of this notice must be entered onto the overdue customer payment record

STEP 4            28 Days overdue – Formal letter of demand

Where payment remains outstanding 45 days and there has been an unsatisfactory response from the customer, a formal letter of demand is to be issued.  Once authorised this letter is to be sent via registered mail and a record of this notice must be entered onto the overdue customer payment record.

  1. Last Resort

If you’ve done everything you can to work with a client who is unable to pay their bill or is simply unresponsive, it may be time to consider other options. You could either take your client to court or hire a collection agency.

Need help to manage your business cashflow better?, contact boss and let an experienced accountant show you how to get more cash into your business today.