Credit management: How to manage your accounts receivable

The impact of Covid-19 and the subsequent inflation means that it’s more important than ever to ensure that you’re getting paid.

This guide has been designed to support you to manage your accounts receivable and ensure you’re getting paid as much as possible. It focuses on key processes that can reduce your business’s exposure to credit risk, including your Terms of Trade, how you conduct credit checks, how you bill and accept payments from customers, how you automate invoicing and payments, and how you manage your accounts receivable.

What is credit management?

Credit management refers to the process of granting credit, setting the terms on which it is granted, recovering this credit when it is due, and ensuring compliance with company credit policy, among other credit-related functions.

Your credit management strategy should focus on:

  • Reducing the amount of financial risk your business is exposed to
  • Increasing the likelihood your business will be paid on time
  • Reducing the chances of cashflow disruptions caused by late payments and bad debts

A credit management review should focus on reviewing how you have provided credit to your customers in the past, acknowledging the weaknesses in your current systems, and improving your processes so that your business is more sustainable going forward.

Terms of Trade

You must have robust Terms of Trade in place before offering credit to your customers.

Your Terms of Trade depict the terms and conditions of a sale and form a contractual relationship between the buyer and seller. It’s important to be as specific as possible to ensure your customers know their rights and obligations. Your Terms of Trade allow you to do what you need to do in the event a customer doesn’t pay on time, as well as ensuring you maximise your margin and profit and therefore maximising your cash position.

Ensure customers accept your Terms of Trade before they first buy from you. Customers must acknowledge in some way that they’ve read and accepted your Terms of Trade; it’s not enough to simply send them to customers. You can change your Terms of Trade as you go but you must point out changes to customers and get them to

confirm that they accept these changes. If you don’t do this, any changes to your Terms of Trade may be unenforceable.

It’s likely some of your terms will need to be updated to reflect changes to your business practices as a result of the impact of Covid-19. Pay particular attention to your payment and delivery terms and how these may need to change.

Review your Terms of Trade and ensure that they cover:

  • Delivery (how, when, cost, late delivery).
  • Installation.
  • Limits on liabilities.
  • Warranties.
  • Details of each party.
  • Payment terms and late payment implications (interest on late payments, cost of pursuing debt).
  • Personal guarantees from company Directors or Trustees of a Family Trust.
  • Price and matters that impact price (tax, estimates vs quotes, variations).
  • Reservation of title.
  • Risk and insurance.
  • Other relevant items (indemnities, governing laws, force majeure, privacy, credit checks, etc.).

After reviewing and updating your Terms of Trade, share them with your customers, highlighting key changes.

You must continue to enforce your Terms of Trade at this time. Don’t let your customers avoid paying you, as this will have a material impact on the sustainability of your business. Cash is the oxygen your business needs to survive, so ensure you have sufficient cash coming into your business from your customers.

Ensure that if you need help developing robust Terms of Trade for your business, get in touch with us. While any updates won’t apply to current accounts receivable, it will ensure you have clear terms for customers to adhere to in the future. Contact KMT Partners if you need help updating your Terms of Trade.

Billing

It’s essential to invoice your customer immediately after supplying the products or services. The time between the delivery of the products or services and receipt of payment should be as short as possible.

Utilise online billing software, such as Xero, to invoice customers. Clearly identify the amount due, due date and payment options on each invoice. Make it as easy as possible for the customer to pay, e.g. direct debit, direct credit, online payments or credit card.

If your customer is experiencing financial distress, we recommend including a statement on the invoices and statements acknowledging their hardship, for example:

“If you’re not in a position to pay an invoice in full, we ask that you communicate this early by calling us so we can work together and discuss your options. Thank you in advance for your co-operation and support.”

Payment Terms

Review your current payment terms. Consider:

  • Shortening your payment terms, e.g. from the 20th of the following month to 10 days after invoice
  • Offering additional payment alternatives, e.g. credit card, direct debit, online payments
  • Offering a small discount for prompt payment

The best-case scenario is for customers to pay on receipt of invoices, however, many businesses might be struggling with cashflow right now and you may need to offer them additional flexibility, for example:

  • A partial payment within the next week with the remainder paid at an agreed future date
  • An instalment arrangement to spread payments over a specified timeframe (e.g. 6-12 months)
  • Use of a fee funding or invoice funding service

Automation of billing and payments

Invoicing directly from your accounting software can enable faster payment of your invoices. Xero allows customers to pay their bill directly from their invoice using a credit card, PayPal or Stripe; ensure you have enabled this option if using Xero.

Create invoice templates and set up automated email reminders. Remember, contact with the customer should be made as soon as their invoice becomes overdue, so don’t set the first reminder email to go out 7 days after the invoice was due.

If you have customers you invoice regularly, set up repeating invoices to automate this process and ensure invoices are always sent.

For more strategies on how to maximise prompt payment and debtor management, download our KMT Guide to Credit Management for free.

Contact KMT accountants now for further assistance with your cashflow or credit management!

This is general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this document, you should assess your own circumstances or seek tax advice from a qualified accountant at KMT Partners. Information is current at the date of issue and may change.