P. 07 5536 2111 | F. 07 5536 3933
sullivan rees logo
E.

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.

Accounting
services

In the constantly changing business environment, you can rely on our business services team to be expert, up-to-date and ready at hand to assist you with your business matters...

Business
services

Thinking strategically about future changes in the marketplace can be the key to running a sustainable business...

company
secretarial

Communication and effective administration are essential elements of a successful organisation. Regardless of the size of your business, we are ready to support you...

finance
services

We can help you to secure the essential finance for you and your business....

managing your wealth

We can help ensure that your personal wealth is managed as tax-efficiently as possible. ...

tax services

We regularly deal with a broad range of personal and corporate taxation issues and make a point of understanding the individual needs of every client. Whether you need advice on company tax, personal tax effectiveness or indirect taxation....

specialist services

In addition to our normal services, we have a developed specialist knowledge and expertise in Self-Managed Superannuation Funds....

firm news

Using A Corporate Trustee Instead Of Individuals For A Family Trust

Posted on July 19, 2021 by admin

A family trust is a great structure.  It provides tax flexibility whilst giving you asset separation in two directions.  But what does asset separation in two directions mean? And why might we suggest it to you as a recommendation?

First of all, why do you want asset separation? If there are multiple assets, you want to make sure that if someone makes a claim against the owner of a particular asset that your other assets can be quarantined from that claim. This isolation will mean that they can’t gain access to the assets that are yours and separate from the claim.

If you own a business and have a successful financial claim made against your business where the claim is for an amount that is more than the assets of the business, you will first need to use the business to cover the claim, and then find something additional to supplement the shortfall. In this case, if you also own your own home, and its worth is enough to cover that shortfall, it may be used to meet the claim by combining the business assets’ worth and the family home’s value. You could lose your family home!

However, if we structure your business in a particular way then the person making that claim will only have access to the assets in the business and you will be able to keep your family home.

This is what is called asset separation. Generally, it’s a good thing to employ, but it does have one flaw – it usually only goes one way.

If someone claims on your business, they won’t get the house but if they successfully make a financial claim against you, they will successfully get all of the assets that you own, including those of your business.  This is a risk that you must be willing to take if you own a business.

When you operate a business through a family trust instead of owning that business, you will merely “control” it, and have but a “mere expectancy” of being considered in the distribution of any profits or capital from that business.

The good part here is that although you only have a mere expectancy to be considered, we would set it up so it is YOU that “considers” who gets the money.  This means that if someone makes a claim against you then they can’t get access to assets in the family trust. What this does is give you two-way asset protection.

There is a bit of an issue with family trusts though – although you will see the debts of the trust as debts of the trust at law, they are in actual fact the debts of the trustee. If you are the trustee, all of the debts of the trust are your personal debts. You can use the trust assets to pay down those debts, but if the trust assets are insufficient to pay the debts, it will be up to you to pay off the rest.

When you’re an individual trustee of a trust, you lose the perk of asset separation, which is why a company may be used as a trustee, as the company does nothing other than act as the trustee of the trust. If there are insufficient funds in the trust to cover the debts of the trust, then those debts fall on the trustee and the creditors have no access to your personal assets because you have no individual debts owing.

Want to know more about asset separation? Interested in trusts? We’re here to help.

sullivan rees