Watch Your Debtors and Cashflow in Turbulent Times

MANAGE  YOUR DEBTORS AND CASHFLOW

WARNING – CREDIT CRUNCH AHEAD IN TOUGH TIMES –

There is currently a tightening of BUSINESS CREDIT in the Australian Marketplace due to a crackdown by the ATO on outstanding tax. If you extend credit to anyone, make sure you have proper documentation for their account and check their creditworthiness. Ask about their arrangements with the ATO. Many overextended companies will become insolvent in the next twelve months.

Manage your debtors better – You are NOT a bank – There is NO need to offer credit at all – You can get paid upfront for your products and servicing programs using annual or monthly direct debit.

Most household repair guys (oven, fridge, washing, airconditioning) will not come out to your home unless they are paid up-front for service calls.

Consider using a consumer finance provider like Zip Pay, Afterpay, Stripe or Humm or easier payment systems like Stripe to ensure you are getting your money upfront.

Be careful with your Accounts Receivable, Debtors and manage your cashflow.

Here is a useful resource on how to get paid

See Jan Reeves ebook avail online.

Here are some useful tips sourced from ChatGPT

MANAGING YOUR CREDIT APPLICATIONS – GET ALL THE INFORMATION

When creating an application for a client to open a credit account in a pool shop, it’s essential to include the following elements to ensure you gather all necessary information and set clear terms and conditions:

1. Applicant Information
   – Full Name
   – Address
   – Phone Number
   – Email Address
   – Date of Birth
   – Driver’s Licence Number or other ID
2. Business Information (if applicable)
   – Business Name
   – ABN (Australian Business Number) or equivalent
   – Business Address
   – Contact Person
   – Position within the Business
   – Business Phone Number
3. Financial Information
   – Bank Details
   – Bank Name
   – BSB Number
   – Account Number
   – Credit References
   – Names and contact details of other suppliers or businesses that have extended credit
   – Financial Statements (optional for larger credit amounts)
4. Credit Limit Requested
   – Amount Requested
   – Purpose of Credit Account
5. Terms and Conditions
   – Payment Terms (e.g., 30 days from invoice date)
   – Interest on Overdue Accounts
   – Credit Limit Terms
   – Conditions for Suspension or Termination of Credit
6. Authorisations and Consents
   – Consent to Credit Check
   – Privacy Statement (how personal information will be used and stored)
   – Signature of Applicant
   – Date of Application
7. Additional Information
   – Special Requirements or Notes
   – Marketing Consent (optional)

TOP TIPS FOR EXTENDING CREDIT IN TURBULENT ECONOMIC TIMES

In tough economic times, it’s vital for any business owner to take several precautions when extending credit to new accounts. These measures help mitigate risks and protect the business from potential financial losses. Here are some key precautions to consider:

1. Conduct Thorough Credit Checks
   – Credit History: Obtain credit reports to assess the applicant’s creditworthiness.
   – References: Contact provided credit references to verify payment history and reliability.
   – Financial Stability: Review financial statements if available, especially for business accounts.
2. Set Clear Credit Limits
   – Initial Limit: Start with a lower credit limit and increase it gradually based on payment history.
   – Regular Review: Periodically review and adjust credit limits based on current economic conditions and the customer’s payment behaviour.
3. Implement Strict Payment Terms
   – Short Payment Terms: Opt for shorter payment periods (e.g., 15 days instead of 30) to reduce exposure.
   – Late Payment Penalties: Clearly outline penalties for late payments to encourage timely payment.
4. Require Personal Guarantees
   – Personal Liability: For small businesses or sole proprietorships, require a personal guarantee from the owner to ensure accountability.
5. Monitor Accounts Closely
   – Regular Monitoring: Keep a close eye on credit accounts, particularly new ones, to quickly identify any issues.
   – Automated Alerts: Set up automated alerts for overdue payments to take prompt action.
6. Maintain Open Communication
   – Proactive Contact: Reach out to customers as soon as a payment is overdue to discuss the situation and find a solution.
   – Build Relationships: Establish strong relationships with customers to improve trust and communication.
7. Use Credit Insurance
   – Insurance Coverage: Consider credit insurance to protect against non-payment from customers.
   – Cost-Benefit Analysis: Weigh the cost of credit insurance against the potential risk of bad debt.
8. Diversify Customer Base
   – Spread Risk: Avoid over-reliance on a few large credit accounts by diversifying your customer base.
   – Target Market: Focus on attracting customers with strong credit histories.
9. Implement a Credit Policy
   – Written Policy: Develop and enforce a written credit policy outlining the criteria and procedures for extending credit.
   – Staff Training: Train employees on the credit policy to ensure consistent application and understanding.
10. Secure Collateral
    – Collateral Requirements: For larger credit amounts, consider requiring collateral to secure the credit extended.

By taking these precautions, a pool shop owner can better manage the risks associated with extending credit during tough economic times.

MORE TIPS FOR CHECKING CREDIT APPLICATIONS

here are additional tips for checking credit effectively:

1. Use Multiple Credit Reporting Agencies
   – Diverse Sources: Check credit reports from multiple agencies (e.g., Equifax, Experian, Dun & Bradstreet) to get a comprehensive view of the applicant’s credit history.
   – Cross-Verification: Comparing reports from different agencies can help identify discrepancies or overlooked issues.
2. Check Public Records
   – Legal Judgments: Look for any court judgments, liens, or bankruptcies that might indicate financial instability.
   – Business Filings: For business accounts, review corporate filings and status with regulatory bodies.
3. Assess Payment Trends
   – Payment History: Evaluate the applicant’s history of on-time payments versus late payments.
   – Trends: Look for patterns, such as increasing delinquencies or recent late payments, which might signal financial trouble.
4. Analyse Industry-Specific Risks
   – Industry Health: Consider the economic health of the industry in which the business operates, as it can affect their ability to pay.
   – Benchmarking: Compare the applicant’s financial performance against industry benchmarks.
5. Evaluate Capacity to Repay
   – Debt-to-Income Ratio: For individuals, calculate the debt-to-income ratio to assess their capacity to manage additional debt.
   – Cash Flow Analysis: For businesses, perform a cash flow analysis to determine if they have sufficient liquidity to meet obligations.
6. Use Financial Ratios
   – Liquidity Ratios: Assess liquidity ratios like the current ratio and quick ratio to evaluate the applicant’s short-term financial health.
   – Solvency Ratios: Examine solvency ratios like the debt-to-equity ratio to understand long-term financial stability.
7. Review Trade References
   – Trade References: Request and review trade references from other suppliers to gauge the applicant’s payment practices and reliability.
   – Consistency: Ensure that the feedback from trade references is consistent with the credit report information.
8. Conduct Personal Interviews
   – Direct Interaction: Have a conversation with the applicant to understand their financial situation better and to gauge their reliability and commitment.
   – Clarifications: Use the interview to clarify any discrepancies or concerns that arose during the credit check process.
9. Use Credit Scoring Models
   – Credit Scores: Utilize credit scoring models to quantify the credit risk. These models take various financial factors into account and provide a numerical score.
   – Custom Scoring: Develop custom scoring models tailored to your business’s specific credit risk factors.
10. Regular Updates and Monitoring
    – Periodic Reviews: Regularly update and review the credit status of your customers, especially those with significant credit limits.
    – Monitoring Services: Use credit monitoring services that provide alerts for any changes in the credit status of your customers.

By incorporating these additional tips, a pool shop owner can more effectively assess the creditworthiness of potential customers and make informed decisions when extending credit.

EXAMPLE LAYOUT FOR A SIMPLE CREDIT APPLICATION:

Applicant Information
– Full Name: ____________________
– Address: _______________________
– Phone Number: _________________
– Email Address: _________________
– Date of Birth: _________________
– Driver’s Licence Number: _______

Business Information (if applicable)
– Business Name: ___________________
– ABN: ___________________________
– Business Address: ________________
– Contact Person: __________________
– Position: ________________________
– Business Phone Number: ___________

Financial Information
– Bank Name: ______________________
– BSB Number: _____________________
– Account Number: _________________

Credit Limit Requested
– Amount Requested: _______________
– Purpose of Credit Account: ________

Terms and Conditions
(Include detailed terms here)

Authorisations and Consents
– I consent to a credit check: [ ] Yes [ ] No
– I agree to the terms and conditions: [ ] Yes [ ] No
– Signature of Applicant: ______________
– Date: ____________________________

Including these sections will help ensure your application is comprehensive and legally sound.