Payments on company’s vendor and creditors are approved by the cash disbursement department

Good customer and supplier management will ensure you have a consistent flow of money coming in from sales to be able to pay your bills.

Learn how to develop invoices and manage your debtors (people who owe you money), as well as how to pay and build strong relationships with your creditors (your suppliers).

Cash flow is the movement of money in and out of your business. The money coming in is called revenue, and the money going out is your cost of operations.

Good cash flow management will ensure you always have money available to pay expenses, both expected and unexpected.

Your cash flow can be impacted if your customers (debtors) don't make their payments to you on time. In turn, you may not be able to make payments to your suppliers (creditors) or lenders. Even profitable businesses can fail if they are not managing their cash flow properly.

Payment terms

Your business payment terms show when and how customers should pay you.

Your terms should make it as easy as possible for your customers to pay you promptly and efficiently. This will ensure you maintain good customer relationships and a healthy cash flow. If your terms make it difficult for customers to pay you easily, you risk:

• loss of income
• cash flow difficulties
• not being able to pay your suppliers on time
• additional business costs
• insolvency.

Developing payment terms

Payment terms usually include:

• a statement about your accepted payment methods
• availability and terms of credit
• debt collection policies
• terms and conditions that include the number of days until customer payment is required, and any late fees for overdue invoices.

Credit terms

You may choose to offer your customers the option of credit. Think of a customer credit purchase as a business debt. Learn more about offering credit to your customers.

Standard terms of credit can include:

• no credit terms provided
• 7 days to pay from receipt of original invoice
• 21 days to pay from receipt of original invoice
• 28 days to pay from receipt of original invoice.

Offering credit can increase your sales but also brings the risk of non-payments. Before you decide to offer credit options, review whether it suits the nature of your business and whether it's standard practice in your industry or among your competitors.

When setting your credit terms:

• display payment terms clearly on your invoices – decide if you will allow customers to pay part of their invoice before or during the service period
• determine types of payment (i.e. card, cash or other)
• establish your credit limits – this can protect you from customers going into too much credit and not being able to repay you
• decide if you will have an early payment scheme with discounts if customers pay early
• determine each customer's ability to repay the credit – use credit checks to reduce any risk and check if someone is bankrupt
• set your customers' terms shorter than suppliers' terms to avoid being out of pocket
• investigate the costs involved with a credit card and other electronic transactions – you may need to add a surcharge.

Credit and payment policies

Clear credit and payment policies provide clarity for both customers and your business and reduces misunderstandings which can lead to disputes.

Make sure all of your employees are aware of your business's credit and payment policies and are trained in how to use them.

Ensure your payment and credit policies, and related training material, include information on:

• payment methods that your business accepts – include your process for providing receipts for cash and credit card payments
• extended credit terms – include the process for completing customer credit checks in your payment and credit policy staff training
• process for debt collection – include the timing and communication method(s) for following up unpaid debts.

Managing debtors

Debtors are people or businesses who owe you money. Managing your debtors correctly will help you get paid faster and prevent bad debts.

Managing debtors (credit management) includes:

• collecting debts on time
• setting credit limits and payment terms
• processing credit applications and credit checks
• enforcing a clear credit policy
• considering whether you will take out debtor finance.

Develop clear debt collection policies and procedures for you and your staff to follow. These may include:

• when to send out requests for payment
• how to display payment terms
• when to phone debtors – for example, your debt collection policy could state that only the business owner or the finance team are authorised to follow up on unpaid invoices when they are 10 days overdue
• when you will ask debtors to pay by a certain date
• circumstances around negotiating payment plans
• when to ask for debt agreements in writing and what to ask for
• when to engage a debt collection agency.

You must keep records of your debtors to determine your actual income and expenses for the year for income tax purposes. There are also laws governing how you follow up debts with your customers.

Chasing late payments

Being consistent when chasing debtors will help you to recover debts while maintaining good customer relationships.

Contact customers quickly about overdue invoices. For example, if you offer payment terms of 28 days, begin following up debtors when payments are 7 days overdue.

When managing debtors, you should:

• chase debts on a regular basis
• make sure your collection process is professional and polite while being clear about your terms
• request payment in writing as a reminder or final notice
• offer payment plans for customers struggling to pay
• apply penalties for late payments, such as charges or accrued interest
• refuse to supply further goods or services until bills are paid.

Consider if you should have merchant facilities (if you don't already) such as mobile EFTPOS or credit card devices to make it easier to get paid as goods or services are delivered.

You may have other options available to you for chasing late payments, including:

• issuing a letter of demand or, if the customer is a registered company, a statutory demand after seeking advice from a legal adviser
• using mediation, debtor finance or debt collection services
• taking legal action (as a last resort only).

Learn more about debt collection options.

Debt collection laws

By law, there are things you can and can't do to encourage debtors to pay.

You can:

• contact them to request payment by letter, phone or in person
• consider negotiating a payment plan that is suitable for you and the customer
• stop working for or supplying more products to the debtor until the outstanding invoice is paid.

You cannot:

• make contact outside of normal business hours
• threaten, harass, or physically intimidate the debtor
• take or sell any of the debtor's property, unless you have a court order.

Managing suppliers (creditors)

Suppliers (also known as creditors) provide you with the goods or services you need to operate your business. Having good relationship with your suppliers can be mutually beneficial, especially if your business hits challenging times.

Negotiate supplier contracts

When you start working with a new supplier, clearly document your agreed terms in a contract signed and held by both parties. Make sure you negotiate contract conditions (such as delivery times and payment terms) that you both agree on.

At a minimum, the contract with your supplier should include:

• a clear description of the goods or services to be provided
• price and payment terms
• delivery terms
• warranty periods
• dispute resolution terms, including how you'll both manage issues like late payment, and replacement of faulty or poor-quality goods or services
• responsibility for insurance of goods, including when in transit
• termination and exclusion clauses between both parties.

Negotiate payment terms

When discussing payment terms with suppliers, you may ask them to consider:

• extending their payment days (e.g. from 30 days to 45) to help you better manage your cash flow (their terms may not allow this)
• quarterly payments, rather than monthly payments (e.g. utility and energy providers)
• starting the payment term from completion of delivery rather than beginning with milestone payments
• pricing options, such as lower prices on bulk or regular orders or discounts for on-time payment.

Review supplier payment terms regularly to help you manage your cash flow.

If you need to return goods:

• ensure the supplier provides a new invoice
• where an invoice is in dispute, do not process the payment until a credit note is provided.

Pay your suppliers regularly and on time

Try to pay your suppliers weekly or in periods that match typical account settlement periods (e.g. every 14, 21 or 28 days).

You may choose to pay invoices on their due date to maintain a positive cash flow position for your business. Avoid paying after the due date.

Set up payment systems to support your supplier payment policy. This will ensure you pay suppliers on or by the due date, avoid late payments and avoid duplicate payments.

Building relationships with suppliers

Strong relationships with suppliers can play an important role in supporting your business.

Establish and maintain good long-term working relationships with your suppliers by:

• communicating regularly with your suppliers and discuss opportunities
• discussing issues or concerns in an open and constructive manner
• listening to the supplier's perspective
• communicating regularly on issues as they are identified
• keeping track of your supplier's performance
• agreeing on a standard ordering process
• paying your accounts on time.

Strong relationships with your suppliers can be especially important when your business is going through a challenging period. If you've proven to be a good customer, your supplier may be willing to help you out with increased payment terms, higher credit amounts or loyalty discounts.

Not meeting agreed terms with suppliers

There may be times you need to pay outside of your agreed payment terms. Having a good relationship with your suppliers can mean they are more willing to help you out during difficult times for your business.

Contact your supplier as soon as you know you won't be able to meet the agreed terms. Discuss your concerns openly and honestly, and offer alternatives for when you will be able to meet terms again.

Be aware that if you're late on payment, suppliers can take back goods that you haven't paid for.

Your supplier may be able to reclaim unpaid goods if they've registered with the Personal Property Security Register (PPSR). The PPSR is an Australian Government register where suppliers can register their interest in personal property and have protection over those assets until they are fully paid.

Read more about managing late payments to suppliers.

Finding and choosing suppliers

Read about finding and choosing suppliers and maintaining supplier relationships.

Also consider...

• Learn more about resolving disputes with other businesses.
• Find out about negotiating successfully.
• Find out about record keeping for business.
• Learn more about stock control.
• Learn more about debt-collection guidelines for collectors and creditors.

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