Access to cash is critical for a business, not just to meet its regular financial obligations, but to handle an unexpected obstacle, overcome dips and troughs in the market and expand. Yet, as demonstrated by statistics, the importance of healthy cash flow appears to be drastically underestimated in the business world.
Around 4 out of 5 Australian business insolvencies are small businesses with less than 20 employees. Of those 4 small business insolvencies, almost 90 percent are caused by inadequate cash flow and 33 percent are contributed to by poor record keeping practices. These are staggering statistics that point directly to the key cause of cash flow issues – poor debt recovery management. It should prompt all business owners to concern themselves with the adequacy of their cash flow cycle and methods of driving it.
Debt Recovery – The Key to Cash Flow
A regular cash flow cycle is contingent on diligent account collection and debt recovery. Cold hard cash must come to hand before it can be considered ‘income’, so simply making a sale on credit is not the end of the story.
Standard business practice dictates that invoice payments should be collected within 30 days of their issue date. This is rarely achieved by coincidence. Rather it requires solid internal accounting protocols that ensure that every invoice is regularly followed up on until full remittance is received. Regular contact must be made with debtors and comprehensive file notes must be kept on each file recording conversations with debtors, payment status and any negotiated payment plans or extensions.
Where businesses become lax with their record keeping, overdue invoices and bad debts slip through the cracks, leaving your clients to ride off into the sunset with a freebie in their pocket. If this happens regularly, you are basically giving away free services, a practice that cannot be sustained. Sooner or later liabilities will exceed liquid assets and the business will be legally insolvent.
Timing is Crucial
Experts estimate that Australian businesses are owed over $19 billion in unpaid invoices which are past their due date. This is a heck of a lot of money that could be put to good use by small businesses but many simply don’t prioritise debt recovery enough to go get it.
Compounding the issue is the fact that the longer a client’s balance remains outstanding the less likely you are to receive full payment. On average, invoices start out with a 90 to 95 percent chance of being paid within the usual 30 day payment term. After 60 days, chances drop to 70 per cent. After 90 days, they drop again to 45 percent. After 120 days you have only a 20 percent chance of being paid. Beyond this, your prospects of getting anything (if at all) have dwindled miserably.
The point? Be consistent and moderately aggressive early in the piece to recover maximum revenue. Unpaid accounts beyond 60 days are often best left to a professional debt collection agency, and very old or disputed debts should be referred to a solicitor for more aggressive recovery procedures.
What’s the Take-Home Lesson?
Companies go down as a result of poor debt recovery management because they are not facilitating their cash flow cycle and they are causing themselves to incur significant losses through unnecessary write-offs which cannot be sustained. No matter how much trade a business is doing, it will run inefficiently at best, unless it prioritises recovering payment for all the work that it has done.
The sad reality is that many small businesses simply don’t expect to collect invoice payments to involve so much effort. Some are afraid to broach an overdue invoice with new clients for fear of offending them, others put unpleasant tasks like debt collection on the back burner while they focus on other business activities and others simply don’t feel its worth their time or resources to pursue billed amounts that clients refuse to pay. Whatever the reason, neglecting debt recovery turns your business into a charity and teaches clients that they can get away with paying late or not at all without consequence.
If this sounds like your business, take action before it’s too late. Get on top of your internal processes and enlist some collection agency Sydney help to get you on track. Don’t let your business become a statistic.