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Managing your debtors

Depending on the type of business that you are running, it may be beneficial to you to set up lines of credit for your customers. Selling on credit can help you to attract more customers to your business, and can encourage a higher volume of sales from each customer, as they do not have to pay for their purchases upfront.

There are, however, several risks related to allowing customers to buy on credit, including encountering unreliable customers who cannot or will not settle their accounts on time or at all. It is necessary, therefore, to have systems in place to properly screen, manage and collect from your debtors, in order to avoid interruptions in your cash flow and possible financial and legal issues in the future.

Establishing a credit policy is the best way to begin when considering setting up credit accounts for your customers. This policy refers to the actions that will be taken by your business to accept applicants for lines of credit, manage their accounts properly, and follow up on outstanding account balances, including taking legal action if necessary.

— New customers

All new applicants for credit accounts with your business should be properly screened, to ascertain their reliability. It is a good idea to create a form for your customers to fill out when they apply for a line of credit, setting standards that they must meet before you will approve their application.

The form should address the following three Cs of determining suitability:

Character – This is a fairly subjective area of judgement, where you determine a customer’s reliability based on their acknowledgement of a moral obligation to pay their debt. It may be a good idea to attain some level of familiarity with your customers, especially if you are running a small business, before offering them a line of credit. This will make it easier for you to accurately judge their character, and also give you a chance to monitor their previous purchase and payment habits.

Capacity to repay – A customer’s ability to pay their accounts can be determined by an examination of their financial statements and business plan. References from the customer’s bank, previous suppliers or from credit reporting agencies can also help you to decide whether or not they have the capacity to pay their accounts. Reports from credit agencies will outline whether a business has ever taken too long to pay a debt, whether they have current overdue accounts or if they have ever defaulted on a loan.

Collateral – In case the situation does arise where the customer does not have the finances available to settle their account with you, it is important for the security of your business that they offer some form of collateral as surety on their debt. The value of the collateral should be roughly commensurate with the value of the product or service that you have provided for this customer.

— New orders

When a customer places an order, regardless of whether they are a new or established customer, it is important that you have a written record of the order and its stages of progression.

Receiving an Order – Always ask for a written order from your customers; preferably via email or an online system, or by fax or mail alternately, on the customer’s letterhead and with a purchase order number generated by their system. This is a good way to protect your business against the customer possibly denying the order when it comes time for their account to be paid.

Processing an Order – When the order has been filled, a written record should be kept with the original order stating what has been supplied and when. A packing slip, which can be included in a package if you are posting goods to the customer, is an efficient way of keeping this record. Alternately, an itemised list of the goods or services provided should be included on the customer’s invoice.

Proof of Delivery – This is particularly useful when posting, couriering or shipping goods to your customers. Certain postal services and all courier and shipping services will require a signature upon receipt of goods, which you can get a copy of for your business’s records.

— Credit period

The credit period that you state in your policy will be the length of time you allow between the date of purchase and the date that payment is due. Standard practice for small businesses is a 30 day payment period, which will help you to manage your cashflow month by month, keeping your payable and receivable accounts in balance.

Establishing a credit period with your customers should always be done in writing. When they first apply and are approved for a line of credit, you can provide them with a set of terms and conditions in line with your credit policy, which should include their credit period. Also, when invoicing their account you should always specify on the printed invoice how long the customer has to provide payment.

You might consider either offering customers a discount for settling their accounts early, or imposing a fine for late payment. If you decide to do either of these, ensure that they are clearly stated on your printed invoices, and on your terms and conditions if you provide them.

— Collection policy

In the event of overdue or unpaid accounts, having a collection policy in place will assist you in what steps to take with your customers and when to take them.

The first step to take, as soon as the account becomes overdue, is to send your customer a reminder letter letting them know when their payment was due, how much is owed, and requesting that they settle their account within a specified period. One week to 10 days is generally considered an appropriate amount of time to wait before taking further action.

The second step, should the account remain unpaid, is to contact the customer by phone, reminding them again that their payment is overdue, and outlining any possible consequences should they continue to delay payment. It is important to remain polite in such instances, to maintain customer relations and avoid making the situation worse.

The third step to take if the first two have not yielded positive results is to enlist the services of a collection agency. This will incur a fee from the agency, so it is important to judge whether or not chasing the account is worth the financial cost and the cost in time and effort, or whether you are better off taking the loss and removing the customer’s line of credit.

Finally, in extreme circumstances, it may be necessary to take legal action. Before taking this step, make sure that you consult a specialist for legal advice to ensure that you are acting according to the law.

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Super Guarantee Change – Deadlines, Payments & Everything Your Business Needs To Know Before The EOFY

Posted on May 23, 2022 by admin

It is easy to get caught out with superannuation, particularly when you are the owner of a business. With so many things to occupy your mind, superannuation may slip from the forefront.

But as a business owner, you must pay the superannuation guarantee for your staff, and you must pay it on time. A failure to pay it on time will mean that you are no longer able to receive a tax deduction for the payment for that financial year. 

On top of that, you can face hefty penalties (which you won’t get a tax deduction for either!). Now imagine being five days late on a $10,000 super payment, losing the tax deduction on that payment and then copping a $20,000 penalty as well. 

The first thing is to make sure that your super is paid well before the time it is due. This should be a priority payment (a payment that you make before anything else).

As the end of the financial year approaches, it is time to be thinking about the June Super Guarantee payment. You may have until July 28 to make the payment but leaving it until then will not net you a tax deduction until the next financial year. From a tax perspective, this may not be what you want to do (unless you know that in the next year, you will need more tax deductions).

Superannuation also has a few strange rules when it comes to claiming a tax deduction.  For employee superannuation, it is critical that it is paid on time.  More than that, the money has to actually be in the bank account of the super fund for you to claim a tax deduction.  

Unlike other expenses where you can show the money coming out of your bank account, this money needs to be present in your super fund for you to make the claim. If your super guarantee payment hits the bank account of the super fund on June 30th then you can claim a tax deduction for that year.  If, however, it hits the bank account on July 1st then the tax deduction is claimed in the financial year after.

Problems arise when you are paying your super through a clearing house, which takes a number of days to clear your payment and get it to the super fund. For example, you may pay the clearing house on the 25th of June, but your super fund does not receive it into their bank account until the 1st of July. 

The ATO’s Small Business Superannuation Clearing House usually has some concessions in these instances.

If you want to get a tax deduction for your June Super Guarantee payment, you need to work out with your clearing house the latest day that they can guarantee that the super fund will then receive the payment this financial year.  Some of these clearinghouses are quoting that you should be paying as early as the 14th of June.

Finally, with regards to Super Guarantee, remember that the rate increases to 10.5% from 1st July.  This rate applies to wages paid on or after July 1st so make sure your payroll system either automatically updates the rate or that you have updated it to reflect the increase.

Employers who fail to meet their Super Guarantee obligations may also be liable for a range of penalties or charges on top of the super guarantee charge. 

Paying super is an important part of being an employer. To ensure your business remains compliant, remember to: 

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