Managing your
cash flow
A guide for business operators in South Australia
www.statedevelopment.sa.gov.au/smallbusiness
Table of Contents
Overview ............................................................................................................ 3
PART A
01 Profit is not cash .......................................................................................... 5
02 Cash is king .................................................................................................. 6
03 Control of cash ............................................................................................. 7
04 How to prepare a cash flow budget ............................................................ 8
05 Comparing actual results to budget and determining future action....... 11
06 Practical tips for improving your cash flow ............................................. 12
07 Control of debtors (receivables) ............................................................... 14
08 Control of inventory ................................................................................... 16
09 Internal management ................................................................................. 18
10 Summary ..................................................................................................... 20
PART B
01 The 10 golden rules of effective collection............................................... 22
02 Why accounts go overdue ......................................................................... 24
03 Using the telephone as an effective collection tool ................................. 26
04 Handling debtors’ excuses and objections for non-payment ................. 29
05 Other collection tools................................................................................. 31
06 Danger signals to avoid bad debts ........................................................... 33
07 Summary ..................................................................................................... 35
Notes ................................................................................................................ 36
Managing your cash flow
Page 2 of 37
Overview
This Department of State Development guide is divided into 2 parts:
PART A: covers four key financial controls where small businesses are
especially vulnerable:
cash, debtors, inventory and internal controls.
Sound and practical management strategies are provided to help you stay in
control in these critical areas.
Without cash flow, your business would grind to a halt, and for that reason, PART
A focuses on managing cash in your business, highlighting the difference
between cash and profit, outlining how to prepare a cash flow budget and keep it
on track and practical tips for improving cash flow in your business.
PART B: examines one of the most common problems facing businesses today getting paid in a timely manner for goods and services provided.
Good credit management is good business - it means getting paid and on time.
This section covers practical principles and tips that will help you to attain the
three basic goals of the credit provider—obtaining payment in accordance with
credit terms, maintaining customer goodwill and keeping credit losses to a
minimum.
As you read this section, keep this fundamental point in mind—you should strive
at all times to obtain payment in full. When collecting a delinquent account,
payment in full may take the form of the receipt of moneys outstanding or the
giving of an undertaking by the debtor to settle the debt on terms that are
reasonable and which you consider can be met. In appropriate circumstances,
payment plans in the latter category can be accepted, but you should not initiate
such an arrangement when in collection mode.
Also see the following Department of State Development guides:
Financing your business
Taxing your business
Negotiate your way to success
Managing your cash flow
Page 3 of 37
Overview
Readers are advised:
• The purpose of this guide is to provide general introductory information.
• The guide does not purport to contain all the information that would be
relevant to any particular business opportunity.
• The guide is provided to interested persons on the basis that they will be
responsible for making their own assessment of that opportunity with the
assistance of the information provided.
• All figures contained in the guide should be regarded as estimates only based
on general samples and may be subject to error.
• The information in the guide should not be relied upon in substitution for
professional advice and individual investigation.
• Persons interested in pursuing any particular business opportunity are
strongly advised to fully inform themselves by taking professional advice as to
the extent of their rights and obligations—particularly in relation to any
proposed investment.
• The guide is provided subject to the terms of the formal disclaimer, which
appears on the last page.
Managing your cash flow
Page 4 of 37
PART A
01 Profit is not cash
When using budgets in business, the distinction between profit and cash must be
clearly understood - they are not the same thing. It is often said that more
businesses fail through a lack of cash than a lack of profit. Why is this so?
A profit projection is the tool that allows you to address the viability of your
business. It shows how much you can expect to earn over the next 12 months.
But in projecting a bottom line, it includes non-cash expenses such as
depreciation, does not take into account timing differences (e.g. payments to
creditors and receipts from debtors) and excludes payments of a capital nature
such as loan repayments and the purchase of equipment. For these reasons,
your profit projection does not provide you with an estimate of your cash position.
Your business needs to be both profitable and liquid. Liquidity refers to the ability
of your business to meet its commitments as and when they fall due. This means
having cash available when required. A business may generate substantial cash
receipts but record a modest level of profit or even a loss. Alternatively, a
business in a strong growth phase may generate increasing profits but be cash
poor due to a higher commitment of funds to debtors and stock.
Planning for cash flow will ensure that your business can meet its day-to-day
commitments in a timely manner.
Managing your cash flow
Page 5 of 37
PART A
02 Cash is king
Your business first needs to survive before it can be successful and the crucial
requirement is the availability of cash when you need it - Cash is ‘king’ in the
small business world. This is apparent when you consider what happens when
serious cash flow problems arise in a business:
• Confidence and morale are eroded and the excitement that being in business
once represented ebbs away.
• The owner cannot buy time to work his or her way out of difficulties and sheer
survival often means acceptance of less than the best option.
• Contingency funds are not available to meet emergencies.
• The business owner operates under constant fear that wages may not be able
to be paid or a critical supplier will cease to deliver due to unpaid bills.
• Desperate sales are made by the business, often below cost, merely to
survive. There are clear limitations to this practice.
• Purchases in large quantities to attract volume discounts cannot be pursued.
• The business cannot recruit and retain top quality people as they seek a more
certain future.
• Loan, lease, taxation and other commitments are often paid late, incurring
penalties and interest.
To be successful in business, you must be in control of the cash situation,
including the timing of cash inflows and outflows. The starting point is the cash
flow budget.
Managing your cash flow
Page 6 of 37
PART A
03 Control of cash
A cash budget can be used as a planning and control tool, but it will not do the
control job. It will, however, highlight financial tight spots and indicate
weaknesses that require attention.
The control of cash involves control in a number of other areas. Your cash
position can be affected by:
CHECKPOINT
APPLICATION
TO MY BUSINESS
Y
N
NOTES
Sales
declining
with
resultant fall-off in revenue.
Debtors being slower than
expected in paying their
accounts.
An opportunity arising for
favourable
speculative
buying, not covered in the
purchasing budget.
Increases in the prices of
materials, supplies, labour
and operating costs.
A smaller proportion of
cash sales and a larger
proportion of credit sales
than expected.
Managing your cash flow
Page 7 of 37
PART A
04 How to prepare a cash flow budget
A cash flow budget is a prediction or forecast of what cash will be available to
meet the expenses of your business over a nominated period of time, usually 12
months. It shows the expected flow of cash in and out of a business and predicts
the bank balance at the end of each month. This means that you can plan for
those months when additional funds are needed, or consider how to make the
best use of short term cash surpluses.
Keep in mind that a cash flow budget is a plan. Although external events may
cause variations in actual performance compared with what you have forecasted,
it is the cash flow budget which will help you to get your business back on track
through the process of review.
You can prepare a cash flow budget manually or use computer software
packages like Microsoft Excel which streamline the procedure markedly. Your
accountant can also be a source of major assistance in this aspect of your
business operations.
CHECKPOINT
Steps
Tips and factors to consider
Resist the temptation to over-estimate your sales. Are your
sales all for cash, all on credit or a mixture? If a mixture, what
proportion each month are likely to be in cash? Is the proportion
likely to be the same each month, or will seasonal factors have
an influence?
1. Estimate
cash receipts
(including
GST) over the
budget
period
What is the pattern of cash receipts from debtors (credit sales)
likely to be? What proportion are likely to pay in the first month,
second month and third month after the sale? List the
assumptions that you make on this and enter the amounts on a
separate working paper for input to your cash flow budget.
Do you propose to sell any assets surplus to your
requirements? This would represent another source of cash
receipts.
Have you negotiated any loans that you propose to draw down
in the period covered by your cash flow budget? The loan
proceeds represent another form of cash receipt.
Identify all cash expenses incurred in the operation of your
business and list them in alphabetical order.
2. Estimate
cash
payments
(including
GST)
For each expense, determine how often payment needs to be
made, when the payment is required and how much the
payment will be.
Cash payments should be entered in your budget in the month
when they will be paid, not when the obligation is incurred.
Managing your cash flow
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PART A
04 How to prepare a cash flow budget
CHECKPOINT…CONTINUED
Steps
2.
Estimate
cash
payments
(including
GST)
Tips and factors to consider
Payments for stock can usually be determined as a percentage
of the sales you have forecasted. If your present stock level is
too high, reduce this purchases figure by the amount you want
to reduce your stock i.e. as you sell stock, you will not replace it
with new stock.
If you plan to build up your stock, increase your annual
purchases by the planned increase in stock. Consider how you
will spread your purchasing over the year.
Based on the payment terms you have negotiated with your
suppliers, determine when you will have to pay for your stock
purchases. You may wish to maintain a separate working paper
on this for input to your cash flow budget.
For items paid weekly, allow for the months that have five pay
days, not four. Don’t forget to include your personal drawings
from the business.
As well as regular expenses, do not overlook items such as tax
payments, the purchase of capital items such as plant and
equipment and loan repayments.
It is often a good idea to work on the cash payments side of
your cash flow budget first—expenses are often easier to
estimate and their timing is usually known. Adoption of this
approach will help to build your confidence, especially if cash
flow budgeting is new to you.
3. Include a
measure
of
flexibility in
your
cash
flow budget
by way of inbuilt buffers
Keep some contingency funds in your budget—something may
go wrong at the worst possible moment. You can do this by
considering some “what if” scenarios, such as the impact on
your cash flows should:
• Sales fall off by ...
• Costs rise by ...
• Interest rates go up by ...
• Suppliers be late with their deliveries.
4. Calculate
the net cash
surplus
or
deficit
for
each month
This is obtained by subtracting the total of cash payments from
the total cash receipts—a surplus arises if budgeted cash
receipts exceed budgeted cash payments; a deficit results if
your estimate of cash payments exceeds your estimate of cash
receipts.
Managing your cash flow
Page 9 of 37
PART A
04 How to prepare a cash flow budget
CHECKPOINT…CONTINUED
Steps
Tips and factors to consider
5. Add in
cash on hand
This is represented by your bank balance at the start of the
period for which you are budgeting.
If the balance is an overdraft, use brackets to show a negative
figure.
6. Calculate
the closing
bank balance
for the first
month and
progressively
for each
month
thereafter
This is achieved by adding the net cash surplus or deficit for the
month to the previous month’s bank balance.
This is of great assistance when you monitor and review actual
performance against budget projections.
7. List each
assumption
separately as
you prepare
your cash
flow budget
It also helps to develop your budgeting skills—as part of the
budget review process, you can identify assumptions that may
have been set too conservatively or, conversely, too
aggressively. Such situations can be taken into account when
compiling cash flow budgets in the future.
It is only after considering assumptions carefully that you will be
able to assess the validity of financial projections.
8. Make
decisions in
respect of the
investment of
any short
term cash
surpluses
that may be
generated or
extra short
term
borrowings
that may be
required to
sustain the
planned
operations of
your
business
These management decisions reflect the fundamental purpose
for preparing a cash flow budget.
If the need for short term borrowings is identified, you can make
a timely approach to your banker and demonstrate that you are
managing your business pro-actively.
If cash surpluses are projected, you can shop around for the
best interest rate, consistent with the level of risk you are
prepared to accept.
Managing your cash flow
Page 10 of 37
PART A
05 Comparing actual results to budget and
determining future action
You should regard your cash flow budget as one of the most important
management tools in your business. It should be referred to regularly and
forecasted results compared to actuals at least monthly. Such a comparison will
show you how the business is performing, highlight potential problems and,
because you are preparing it in advance as a planning tool, will allow you time to
find ways either to prevent such problems occurring or to minimise their impact.
Refer to your cash flow budget at least monthly and insert “actual” results. Then
compare forecasted results to actual performance and calculate variations, both
positive and negative.
This will highlight how well you are doing and enable you to take corrective action
if necessary. Learn what is working and what is not. Conduct a review
immediately after the end of each month—timing is more important than total
accuracy.
Also be prepared to use your cash flow budget as a communication tool with key
staff and stakeholders outside your business. This could include your bank, other
lenders, your accountant and major suppliers if you are seeking to negotiate
extended terms.
Managing your cash flow
Page 11 of 37
PART A
06 Practical tips for improving your cash flow
Use the following checklist to evaluate your existing cash management system
and identify actions that need to be taken to improve cash flow in your business.
CHECKPOINT
ACTIONS TO TAKE
Manage your banking
relationship pro-actively.
Increase the proportion of
cash sales.
Investigate implementation of
a system of “pay on invoice
only”, rather than sending out
monthly statements.
Speed up your invoice process
and collection practices.
Get paid for your credit sales
more promptly through
progress payments, payments
with orders, deposits with
orders and use of credit cards.
Establish an accounts payable
policy.
Review each step in your
stock management system.
Evaluate ways of getting your
stock on better terms such as
consignment stock, extended
credit terms, forward dated
invoices for seasonal
purchases, discounts for
prompt payments and
scheduling deliveries as late
as possible.
Evaluate whether to take a
discount or to offer a discount.
Managing your cash flow
Page 12 of 37
PART A
06 Practical tips for improving your cash flow
CHECKPOINT…CONTINUED
CHECKPOINT
ACTIONS TO TAKE
Avoid or minimise bad debts
through established credit
assessment procedures.
Carefully assess the true
benefits of “deals”.
Control the level of overtime
worked, evaluate the use of
part-time and casual staff
rather than permanent staff
and negotiate payment to
sales people based on results.
Consider using subcontractors rather than buying
your own equipment.
Consider buying used
equipment.
Rearrange annual payments
such as insurance to times of
less financial pressure or pay
smaller amounts more
frequently.
Set aside cash each month to
meet tax bills.
Don’t keep idle balances in
accounts that do not pay
interest—ensure any short
term cash surpluses are
invested wisely.
Ensure any short-term cash
surpluses are invested.
Managing your cash flow
Page 13 of 37
PART A
07 Control of debtors (receivables)
You commit funds to debtors because you expect a net gain from the
commitment—a gain which will enhance the value of your business through a
greater inflow of revenue from sales.
But there are costs attached to extending credit to your customers. They include
the cost of funds tied up in debtors, the cost of bad debts and slow-paying
accounts and administration.
To maintain effective control over debtors, here is an action checklist of practical
steps that you can take:
CHECKPOINT
Create a credit policy
ACTIONS TO TAKE
Determine a credit policy that is
appropriate and realistic for your
industry.
Screen potential credit customers
Use a credit application form obtain
and check references.
Always know exactly to whom credit is
being extended, e.g. partnership,
proprietary company etc.
Obtain credit reports from a mercantile
agency or bank.
To confirm details supplied conduct
searches at the Australian Securities
and Investment Commission (ASIC),
Business Names Registry
https://connectonline.asic.gov.au/Re
gistrySearch/faces/landing/bn/Searc
hBnRegisters.jspx?_adf.ctrlstate=yix1id751_4
Set a credit limit and review
periodically.
Conduct an ageing analysis of debtors
on a regular basis. It serves as a useful
indicator of any deterioration in the
quality of your debtors.
Exercise care in respect of exposure to
any major debtor—it can have a
devastating effect on your business
should the debtor fail.
Managing your cash flow
Page 14 of 37
PART A
07 Control of debtors (receivables)
COLLECTION OF MONEY
ACTIONS TO TAKE
Implement a fair but firm collection
procedure
Credit stickers on overdue accounts.
Collection letters.
Telephone calls, facsimile and email
communications.
Legal action, etc.
Be fully conversant with the tell-tale
signs of a deteriorating customer
account
Accounts only partially paid each
month.
Late payments.
Payments rounded off each month.
Purchases beyond normal levels.
Cheque not signed (delay tactic).
Mistakes with date or amount of
cheque (delay tactic).
Development of attitude of indifference
on part of customer.
Managing your cash flow
Page 15 of 37
PART A
08 Control of inventory
Holding inventory is costly. Costs include interest on funds invested, storage
facilities, staff costs, insurance, deterioration and losses.
Inventory control is a lot more than just doing a check to make sure it exists.
Here is an action checklist to help you make efficient inventory control an
essential part of your business.
CHECKPOINT
ACTIONS TO TAKE
Focus through application of the 80/20
rule—20 per cent of inventory is likely
to generate 80 per cent of sales and 80
per cent of sales are likely to come
from 20 per cent of customers.
Document all orders for inventory. This
will help you to ask the important
question—do I really need it?
Don’t be afraid to say no—if you do not
think an item will sell, don’t buy it.
Establish an adequate system for
monitoring your level of inventory.
Conduct stocktakes regularly.
Determine the optimum level of
inventory for your business.
Establish re-order points for
replenishing inventory items.
Make adjustments for changes in
customer demand when planning
orders.
Managing your cash flow
Page 16 of 37
PART A
08 Control of inventory
CHECKPOINT…CONTINUED
CHECKPOINT
ACTIONS TO TAKE
Familiarise yourself with suppliers’
delivery capabilities.
Order in the most economic quantities.
Take advantage of purchase discounts.
Keep track of slow-moving stock.
Spot potential fast-movers.
Balance your inventory by price, line,
colour, size and type.
Select inventory with your target
customers in mind.
Managing your cash flow
Page 17 of 37
PART A
09 Internal management
How can you ensure tight internal control in your business? How can duties be
allocated when there may be just one employee? The answer is that you must
step in as owner and become part of the office and an unofficial auditor.
The following action checklist will help you to exercise effective internal control in
your business.
CHECKPOINT
ACTIONS TO TAKE
Open the mail.
List mail receipts.
Review the listing of mail receipts
carried forward to the cash receipts
journal.
Personally sign all cheques.
Personally approve all documentation
in support of payments.
Review the bank reconciliation; at
random intervals, perform a bank
reconciliation.
Review notices to be sent out to tardy
debtors.
Personally approve all debt write-offs
and discounts.
Periodically test-check accounts
payable statements.
Managing your cash flow
Page 18 of 37
PART A
09 Internal management
CHECKPOINT…CONTINUED
ACTIONS TO TAKE
Personally do all the hiring and firing.
Personally approve and sign payroll
cheques or bank documentation where
a direct credit system is used.
Become familiar with all fixed assets of
your business.
Periodically supervise a physical
inventory check.
Require all employees to take periodic
holidays.
Use the services of an external
accountant to review your accounting
records and systems.
Managing your cash flow
Page 19 of 37
PART A
10 Summary
1
The first rule of business is don’t run out of money.
2
Cash is the lifeblood of your business.
Without it, your business can fail.
3
Four key areas of control to which your business is
likely to be vulnerable are the management of:
cash, debtors, inventory and internal controls.
4
A cash flow budget is the very important management
tool that shows the expected flow of cash in and out of
a business and predicts its bank balance at the end of
each month.
5
Learn to differentiate clearly between cash and profit.
6
More businesses fail through a lack of cash than a lack
of profit.
7
Planning for cash flow will help to ensure that your
business can meet its day-to-day commitments in a
timely manner.
8
When preparing a cash flow budget, build your selfconfidence by directing attention to the cash payments
side first. Outgoings are often easier to identify and
estimate and their timing is usually known with greater
certainty than cash receipts.
Managing your cash flow
Page 20 of 37
PART A
10 Summary
9
Build flexibility into your cash flow budget by
considering a number of “what if” scenarios.
10
Compare actual results against budget as soon as
practicable after the close of each month and take
corrective action where necessary.
11
Be prepared to use your cash flow budget as a
communication tool.
12
Constantly review the management of cash resources
in your business and always be on the lookout for
practical measures to improve its cash flow.
13
Debtors (receivables) in your business can be
controlled effectively if a credit policy is determined,
potential credit customers are screened, an ageing
analysis of the debtors ledger is performed and
monitored regularly, a collection procedure is followed
and you are able to read the danger signs of a
deterioration in the quality of debtors.
14
The 80/20 principle has wide application in small
business management, including the effective control
of inventories. e.g. 20 per cent of inventory generates
80 per cent of sales.
15
Tight internal controls within your business
minimise
the
opportunity
for
stealing
embezzlement
and
depend
largely
on
preparedness to play an active part in
implementation.
Managing your cash flow
will
and
your
their
Page 21 of 37
PART B
01 The 10 golden rules of effective collection
The effectiveness of any collection effort depends on there being an established
policy for credit and collections. A workable policy is one that establishes written
guidelines for granting credit, outlines a procedure to follow once delinquent
debtors have been identified and guides those involved with the credit function
on what to do, when to do it and how to do it.
When it comes to collections, your prime goal is to obtain payment in full as
quickly as possible. This must be achieved in a manner that maintains customer
goodwill and observes the principles of sound business practice. Payment in full
need not just take the form of the receipt of cash or a cheque in satisfaction of a
debt. It occurs either when the money owing is paid or when the debtor gives an
undertaking to pay that you consider is reasonable and capable of being met by
the debtor.
Payment in full must be obtained as soon as possible because the cost of
collecting an account increases everyday that it remains uncollected. Each time
an account is handled, there are administrative costs, collection costs and
overheads and these continue until the account is eventually paid or written off.
Each contact that is made with a debtor and each payment that is processed
costs money. And the longer a delinquent account is held, the less the chances
are that it will be collected at all.
To be effective in collecting money from debtors, you must seek to observe the
following ten golden rules overleaf.
Managing your cash flow
Page 22 of 37
PART B
01 The 10 golden rules of effective collection
TEN GOLDEN RULES CONTINUED
NOTES
Establish a sound credit policy and
commit it to writing.
Ensure your customers know your
credit terms.
Carry out a methodical assessment of
each credit risk.
Ensure that close liaison and cooperation are maintained between
sales and credit personnel.
Monitor credit accounts regularly.
Take timely and decisive action in
respect of delinquent accounts.
Implement the payment-in-full strategy
at all times.
Be accurate in terms of information
used in all communication with debtors.
Be persistent in follow-up action until
payment is received or a conclusion is
reached that nothing more can be
gained by proceeding further.
Avoid being a “paper tiger,” that is,
making threats to debtors about
possible future action that you are not
prepared to take.
Managing your cash flow
Page 23 of 37
PART B
02 Why accounts go overdue
Being aware of the reasons that accounts go overdue can improve your
collection technique, whether it takes the form of a letter to a customer, calling
the debtor on the telephone or making a personal visit to discuss the debtor’s
position.
CHECKPOINT
Reason
Solution
Arises from poor acceptance procedures.
Misunderstood
terms
A standard copy of your trading terms should be provided
to the customer when the account is opened so that the
possibility of misunderstandings is minimised.
Those employed in sales should be trained to reaffirm
trading terms with customers.
Speedy sales or technical action is needed to resolve
problems.
Grievance or
dispute
Properly maintained customer records will help to identify
unusually dispute-prone debtors and enable precautions
to be taken.
Carelessness and
inefficiency on part
of debtor
Careless and inefficient debtors are prone to oversight.
Issue of reminders and copy invoices is frequently
required to obtain payment.
Small amount
involved and
therefore ignored
until account
becomes larger
This is a delaying tactic used by debtors, rather than
outright avoidance. You must be firm and persistent to
obtain payment.
Staller or
consistently slow to
pay
If appropriate checking is carried out at the time of
opening the account, you should be capable of identifying
this trait in advance. Most debtors in this category will use
manipulative tactics ranging from the well-worn “the
cheque is in the mail” to complaints about merchandise or
service.
Constant follow-up is required and you need to recognise
the costs associated with management of this type of
account.
Managing your cash flow
Page 24 of 37
PART B
02 Why accounts go overdue
CHECKPOINT…CONTINUED
Reason
Solution
This factor represents the prime source of difficulties in
credit management.
Poor business
management
You must carefully assess timeframes associated with
payment plans offered by debtors in this category—while
entered into with good intentions, they frequently are
unable to be kept within acceptable limits.
This type of account represents marginal business and
you should decide whether it is worth carrying.
Temporarily out of
cash but good risk
You can enter into special arrangements on a one-off
basis with this type of debtor. You need to ensure,
however, that it does not become a regular occurrence.
Ability to pay but
lack of will to pay
You need to adopt a firm collection strategy with this type
of debtor. Persistence is needed when dealing with
debtors in this category because they will often only pay
after legal action has been commenced.
Over-commitment may be due to illness, unemployment,
some kind of catastrophe or because the debtor just
cannot manage finance.
Over-committed
financially
Fraud—blatant
dishonesty
Managing your cash flow
Solutions may take the form of education, financial
counselling (financial restructuring may be necessary)
and, where appropriate, working out a mutually
acceptable payment plan to clear the debt.
You must be prepared to commence legal action
immediately and, where appropriate, have such cases
listed nationally with a debt collection agency.
Page 25 of 37
PART B
03 Using the telephone as an effective
collection tool
The telephone is the most widely used method for collecting overdue accounts. It
is direct and economical and feedback is immediate. The debtor can be
encouraged to talk and this enables an appreciation to be gained of the debtor’s
attitude to payment of accounts.
As a debt collector, the more convincing you are when telling debtors what you
want them to do, the more likely they will do it. Successful telephone collection
calls are those that are structured and controlled. To hold the advantage in a
telephone call to a debtor and to remain in control, you need to know the debtor
and be organised.
CHECKPOINT
Steps (what to do)
Comments (how to do it)
Plan the call and determine what you want as the
outcome. Have all information and data readily available,
such as:
• Correct telephone number and right contact name.
• Amount outstanding.
• What the debt is for (goods or services purchased).
• Customer order numbers.
• Evidence of receipt of goods or services.
1. Prepare to make
the call
• Date of last transaction.
• What the past volume of sales has been.
• Record of customer’s payments in the past.
• How many attempts have been made to contact the
debtor.
• Form in which previous communications have been
made (letter, telephone, facsimile or email).
• Record of last call made to the debtor.
• Present or last known address.
Managing your cash flow
Page 26 of 37
PART B
03 Using the telephone as an effective
collection tool
CHECKPOINT…CONTINUED
Steps (what to do)
1. Prepare to make
the call
Comments (how to do it)
• Whether any other member of staff has communicated
recently with the debtor.
• Whether the debtor has a standard excuse.
Be prepared to take control.
Be positive.
Identify yourself.
2. Make an
introduction
Identify the person you are talking to.
State the reason for your call.
If the person you need is not there, you may leave your
name but do not disclose the reason for your call.
Ask for payment in full.
Convey a sense of urgency by setting deadlines.
Use a pause to put the burden of conversation on the
debtor. e.g. “I need your payment no later than Friday”.
Pause. Don’t say another word. You are applying
pressure in the most powerful way possible—silence.
Ask questions.
3. Converse with
the debtor with a
Be a good listener-listen for clues on how the debtor may
view to obtaining
be able to pay.
payment in full
Obtain and evaluate information.
Use the information to close the call.
Sell benefits of paying.
Don’t argue, preach, judge or moralise.
Don’t let the debtor rattle you.
Managing your cash flow
Page 27 of 37
PART B
03 Using the telephone as an effective
collection tool
CHECKPOINT…CONTINUED
Steps (what to do)
Comments (how to do it)
Assume leadership in finding a solution to payment.
4. Find the solution
When the debtor indicates why the account has not been
paid, you will have an indication as to how the account
may be resolved.
Do not agree to an instalment plan until you know with
conviction that there is no alternative.
Payment will be obtained if you can combine the debtor’s
motivation to satisfy some need (physical, security, social,
ego or self-fulfilment) which appeals to the debtor’s
honesty, integrity, pride, fears or anxiety.
5. Motivate the
debtor
Examples of motivating statements that work:
• “You want to keep a sound credit rating?”
• “Unless you do something, we must...”
• “Show your good faith by paying the account today.”
Close the call when you have achieved payment in full or
reached agreement as to acceptable terms.
If payment in full cannot be obtained, remember that a
debtor’s first offer of a payment plan is seldom their best.
6. Close
Where an instalment plan is adopted, a commitment to
amount, method and dates for payment is required.
Send a letter, facsimile or email by way of confirmation.
Record details in the debtor’s file and diarise for followup.
Managing your cash flow
Page 28 of 37
PART B
04 Handling debtors’ excuses and objections
for non-payment
When proposing any form of communication with a delinquent debtor, you should
consider and prepare for all possible objections to payment. Responses should
be readily available to meet the most likely objections.
Where the communication with the debtor is by telephone, you need to be aware
that it is easier for the debtor to offer varied excuses for not having paid the
account. Since the debtor is not visible, it is also probably easier for the debtor to
stretch the truth.
It should not be overlooked that the debtor may have a genuine reason for
delaying payment of an account. It is your task to bring this out by listening
carefully to what is said. You should prepare questions and pose them in such a
way that the debtor is compelled to answer them. You should then listen carefully
to the debtor’s response.
Use the following checklist to record how you propose to respond to excuses and
delaying tactics utilised by your debtors. Examples have been included to guide
you.
CHECKPOINT
Excuse or
delaying tactic
Possible response
“The cheque is in
the mail”
That’s great. Could you please tell
me the cheque number and how
much the cheque is for? When did
you post the cheque?
“We have returned
a box of widgets
and are awaiting a
credit note”
How you propose to
respond
If you give me the details, I’ll get
that credit organised for you
straight away.
However, this is only a portion of
your overdue account. Please
deduct the widgets and send in
your cheque by……
Your account is well overdue. Do
“Oh, hasn’t that
you need a copy invoice or can I
been paid yet? I will
speak to someone else there who
look into it”
can speed up our cheque?
Managing your cash flow
Page 29 of 37
PART B
04 Handling debtors’ excuses and objections
for non-payment
CHECKPOINT…CONTINUED
Excuse or
delaying tactic
Possible response
How you propose to
respond
“This has been
passed for payment
May I please speak to Mr Smith?
but I am waiting for
Mr Smith to sign it”
I would appreciate that. To save
“I’ll have to check
us both time, could you please
my records and get
check it out now; I am happy to
back to you”
wait.
When do you expect to have the
information?
“No!”
Or, I will give you a call back at
4:00PM today. Would you have
the details then?
Great. I will jot that in my diary. If I
“I will call you back
don’t hear from you later today, I
with the information
will call tomorrow. Thanks for your
you require”
co-operation.
What is the telephone number
and address of your head office?
“Our accounts are
paid by head office” Who is responsible for accounts
payable? I’ll make a call
immediately.
Managing your cash flow
Page 30 of 37
PART B
05 Other collection tools
When in collection mode, you should bear in mind that it is highly likely that there
are others who are also trying to collect money from the individuals and firms that
you are contacting. You are just one of a large number trying to get their money.
Therefore, if you are to be successful, you must show why it is better to pay you
than pay someone else. The old adage that the squeaky wheel gets the most oil
is true when it comes to collecting money from debtors, but it’s also the way you
“squeak”. You don’t have to “squeak” in a loud or aggressive manner. As noted
earlier, you can motivate debtors to pay and lessen their resistance.
CHECKPOINT
Tool
Description
Practical Tips
Inexpensive and quick and easy
A collection sticker is a brief to use.
collection message on a small
piece of brightly coloured Best used in association with
Collection adhesive paper.
other collection methods.
stickers
It is affixed to an invoice or Favoured mainly when the
statement to attract attention relatively higher cost of other
and get results.
methods of account collection is
difficult to justify.
Address to a specific person or
job title.
Make it a positive request for
payment.
Two
letters
are
usually
sufficient—a polite first reminder
Ensure each letter is individually
and a final demand.
signed.
Sufficient information should be
Collection included in the final demand to
letters
leave the debtor in no doubt as
to how much must be paid,
when the debt is to be paid and
subsequent
action
if
the
demand for payment is not
satisfied.
Vary the content and timing of
letters to prevent slow payers
taking advantage of a set
pattern.
Don’t make threats you are not
prepared to carry out.
Set a deadline for action.
The downside is that letters can
be ignored.
Managing your cash flow
Page 31 of 37
PART B
05 Other collection tools
CHECKPOINT…CONTINUED
Tool
Description
Practical Tips
Collate all relevant information
about the debtor prior to the visit.
Personal
contact
with
business
customers
An opportunity to talk with a
customer on a direct one-onone basis, observe general
trading conditions and look for
signs that a business may be
ailing.
The person conducting the visit
should have sufficient authority
to
accommodate
the
circumstances presented.
Confirm outcome of discussions
in writing.
Before commencing legal action,
evaluate the following:
• Whether the debtor is still
trading or able to be located.
• Rigour applied to the collection
process so far.
• Quality of documentation held.
Legal
action
must
considered as a last resort.
Legal
recovery
be
• Size of debt.
May be directed through a debt • Reputation of debtor and
collection agency or a legal whether personal guarantees are
held.
firm.
• Financial strength of debtor and
whether security is held.
• Existence of any unsatisfied
court judgments.
•
Legal
costs
involved,
particularly if the proposed action
were to fail.
Managing your cash flow
Page 32 of 37
PART B
06 Danger signals to avoid bad debts
If a thorough check is made on your customers before credit is granted, the
chances of being involved with another firm’s failure can be reduced. You should
always be alert for signs of deterioration in a customer’s business. Appropriate
action can then be taken to manage the existing risk and minimise future
exposure.
CHECKPOINT
WARNING SIGNS TO LOOK OUT
FOR
NOTES
Failure to comply with credit terms
previously agreed and adhered to.
Slow payment of accounts.
Round sum payments.
Seeking more favourable credit terms.
Dishonoured cheques.
Making payments
ordering.
only
when
re-
Enquiries from other credit providers on
creditworthiness.
Failure to return telephone calls or the
telephone is cut off.
Listings
in
mercantile
agency
publications in relation to judgement
debts.
Managing your cash flow
Page 33 of 37
PART B
06 Danger signals to avoid bad debts
EXCUSES SUCH AS:
The computer is down.
The auditors are in.
The cheque signatories are away.
We are restructuring.
We are changing bankers.
OTHER THINGS TO LOOK OUT FOR:
Disputes about invoices leading to short payments.
Post-dated cheques.
Complaints by the client’s customers about service standards.
Any other adverse change in a customer’s payment pattern.
High management turnover.
Ordering goods and services from other suppliers at higher prices.
Unreasonable price cutting.
Slowness in sending out accounts.
Managing your cash flow
Page 34 of 37
PART B
07 Summary
1
In all debtor collection activity, press for payment in
full.
2
You may choose to accept a payment plan put by a
debtor, but it is preferable to refrain from initiating
such an arrangement.
3
The telephone is the most widely used method for
collecting overdue accounts.
4
Plan any collection call by telephone, make a list of
possible objections, determine how you will handle
them and push for a resolution.
5
When seeking to collect payment, say what you mean
and mean what you say.
6
Keep collection letters short and to the point.
7
Collection stickers are inexpensive and represent a
quick and easy method to draw debtors’ attention to
overdue accounts.
8
Development of a close working relationship with large
customers and exact conformity with the requirements
of government agencies can help to speed up the
collection process.
9
Learn from experience.
Managing your cash flow
Page 35 of 37
Notes
Managing your cash flow
Page 36 of 37
Department of State Development
GPO Box 320
Adelaide SA 5001
T: +61 8 8226 3821
E: [email protected]
W: www.statedevelopment.sa.gov.au/smallbusiness
DISCLAIMER
The Government of South Australia gives no warranty and makes no
representation, whether express or implied, as to the accuracy of information
contained within this guide or the suitability of the information for any purpose.
Any use of the information contained in this guide (whether authorised or not) is
at the users’ sole risk and the Government of South Australia disclaims
responsibility for any loss or damage incurred as a result of such use. The
information is provided solely on the basis that users of the information will make
their own assessment of the accuracy of the information and users are advised to
verify all information contained within this document. Any information about the
law in Australia or South Australia is provided as general information only and is
not legal advice. This guide is a starting point only and is not a substitute for legal
or professional advice. While the Department has attempted to ensure the
information is accurate at the time of publishing, no responsibility will be
accepted for any errors or omissions and the Government of South Australia will
not be liable for any loss or damage incurred by any person as a consequence of
any use, reference or reliance on this information. Any such use, reference or
reliance shall be at the sole risk of that person who should seek their own legal
and/or professional advice if required.
COPYRIGHT
Produced by the South Australian Government
© March 2015
Managing your cash flow
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