19 Feb Three keys to minimising customer insolvency
When you own a small business, it can be scary to learn that a customer who owes you money has gone bankrupt – but you can minimise this nightmare situation by thinking ahead.
The latest ASIC figures show small and medium size businesses are most at risk as insolvencies continue to rise.
The ASIC overview based on nearly 8,500 administrators’ reports lodged in the year to July 2017 found 63 per cent included evidence of alleged insolvent trading. This was up from 58 per cent two years earlier. Regrettably, as insolvencies rise, there’s a chance your business could be affected by what happens to your customers.
According to Schon Condon, managing principal of insolvency experts Condon Advisory Group, many business owners only think about the issue after the event. His advice is to take steps before it becomes a possibility.
Condon says it’s important to know your customer and their risks before you start the relationship. “If you are giving credit, you are lending money so you need to find out who you are dealing with. A sale is not a sale until the money is in the bank”, he says.
Know your customers
This first stage of the relationship is also where you ensure your trading terms are in order, along with any legal registrations like on the Personal Property Securities Register, because if things go wrong, your ability to protect yourself can depend on them.
Condon also advises keeping constant tabs on each customer because their circumstances could be very different five or 10 years after they open the account. If you can’t do it yourself, nominate one of your staff or contract specialists to do it for you.
The second stage is when you notice a customer’s payment habits have changed. If they have always been reliable and suddenly they’re not, it’s time to move.
“If your client survives his problem, he survives to pay your bill.”
Find out what’s going on. There’s a potential opportunity for you to help your customer through their difficulties and it makes sense to do that because good customers are hard to find. “If your client survives his problem, he survives to pay your bill. Too many people miss that opportunity,” Condon says.
Stage three is when you discover your customer has gone into liquidation. As soon as you hear your customer has gone bankrupt, make yourself known to the liquidator. If you have any information about what has been going on, pass that on.