Better cash flow management processes and the reduction of bad debt should be a priority for SMEs.
“Bad debts can be catastrophic no matter what the size of the business. However, with the domino effect created by just one or two bad debts, the path to bankruptcy can be a swift one for small business,” says Rory Matthews, CEO of Veda Advantage. “Setting up an effective credit monitoring system is one of the fundamental factors in reducing the risk of bad debt, regardless of the size of the company. Not enough business owners understand how simple it is to run a credit check to screen out potentially risky customers or clients.”
For better credit practices, Veda Advantage offers the following tips:
1. Develop a credit policy. Take the time to write out a clear and concise credit policy that applies to all of your customers and clients.
2. Run a credit check.
3. Incorporate a credit-risk approval system. This increases business efficiency by ensuring the credit worthiness of customers quickly and reliably. Products are available which can assess credit risk, based on the rules tailored to individual businesses; removing any guesswork associated with credit management.
4. Know who you are dealing with. Part of your credit policy should include finding out who is actually behind the business that wants credit advanced.
5. Check whether customers’ assets have existing security rights. Other suppliers may already have rights to claim property if bills are unpaid.
6. Know the credit history of company directors. Ensure that you have adequate systems to highlight debtors that are overdue or exceed their limit.
7. Implement the policy. Make sure staff are educated on how the policy is to be applied. Credit application forms and check lists help staff follow the correct credit approval process, remember to update rules when required.
8. Clean up your data. Don’t forget, existing customers can be bad debtors too. Make sure the credit policy applies to the existing customer before additional credit is extended.
9. Create a regular, adequate system to highlight debtors. You need to be able to regularly and quickly identify when customers’ payments are overdue or they have exceed their credit limit.
10. Put a policy in place for recovering bad debts. To recover a debt you may wish to take legal action, however, you should always weigh up the advantages and disadvantages of legal action for the recovery of bad debts. With an effective credit policy in place, bad debt should be minimal.
“Following these steps could save businesses a lot of time as well as thousands of dollars in unpaid invoices and debt collection fees. To avoid unnecessary loss, the Veda Advantage credit check system is a unique offering and an important product for Australian small business,” says Matthews.
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