Bad debts affect your cash flow, your overall business and can be very costly in terms of the time and money spent to collect them.

It is important to have a system to manage debtors. There are several ways to minimise bad debts:

Upfront payment – depending on the nature of the transaction, upfront or payment in advance can be requested.  Upfront payment is particularly helpful when the transaction amounts are small, delivery is almost immediate, or you do not know the customer

Part payment – request a part or progressive payment of invoices. For example, 50% payment at the start of a contract and the balance on completion

Act quickly – most businesses work on a monthly invoicing system. You should follow up invoices with monthly statements,  reminder letters and telephone calls. Use letters of demand when invoices have been outstanding for longer than three months

Interest charges - if it is appropriate for the business, include an item in the invoice that interest will be charged after a set period

Early settlement  discounts - offer a discount if the invoice is paid within a specified period of time.  This is usually in the form of a  percentage deducted off the invoiced amount if paid by a deadline and acts as  an incentive to pay early.  For example, 5% discount if paid in 10 days, 2% discount if paid in 15 days

Director’s guarantee – a personal guarantee of payment from a director or other company officer

Credit reference checks – if you are offering credit terms to a customer, it is always wise to first run a credit reference check.  This will provide you with the customer’s credit history, payment predictors and financial stability.  Dun & Bradstreet can assist with credit checks.

ASIC can also be a source of company information including if the entity exists and details about its operation.

Despite these measures some customers will still not pay.

When there are no options left but to take legal action, engage a solicitor or a debt collection service. Debt collection services will be found through a search of the internet or Yellow Pages.