Debt Recovery & Insolvency,Litigation & Dispute Resolution,Senior Associate
Phone: 61 7 3001 9260
As published in CK Momentum Issue 10 (Click here to download)
Cash is the fuel that drives business, and many financial analysts consider the condition of a company’s cash flow to be one of the most important
indicators of that business’s financial health. The latest ASIC statistics show that in each of the last 2 financial years “inadequate cash flow
or high cash use” was the top cause for the failure of companies.
Unfortunately, companies facing cash flow crunches often simply throw money at the problem, which is a temporary solution at best. Cash flow management
requires more than just a financial fix. It requires a holistic approach that focuses on preventative measures to ensure against poor cash flow
in the first place.
PREVENTION BETTER THAN THE CURE - AVOIDING THE CASH SQUEEZE
- TIGHTEN UP YOUR TERMS & CONDITIONS
Poorly drafted terms of trade create an environment open to abuse by poor payers. Well drafted terms and conditions incorporated into your customer
agreements or terms of trade will increase your prospects of quick recovery and minimise disputes and recalcitrant payers.
Consider using shortened or different payment terms for different types of work.
GET PERSONAL GUARANTEES
- Thirty day payment terms for routine orders or services could be shortened to 7 or 14 days.
- As a minimum, the terms should contain clauses as to payment, default and termination.
- Think about offering early payment discounts as an incentive.
guarantees might not be needed in all circumstances but if you are supplying large numbers of high value orders to a corporate customer, a guarantee
from the directors (or whoever holds the assets) is essential. Ensure that the guarantee is effective by including a clause charging the guarantor’s
property. This is important if the aim is to secure the guarantee over property.
REGISTER YOUR INTEREST ON THE PPSR
If you supply goods on credit, then it is probable that a security interest will exist capable of registration on the Personal Property Securities
IMPLEMENT AND REVIEW A CLEAR & STRICT DEBT COLLECTION PROCEDURE
If so, it is vital to maintaining that interest that it is registered on the PPSR. PPSR registration may put you ahead of the queue in the
event of a customer’s insolvency. If your interest is not registered, in the event of customer insolvency you will lose any proprietary
interest in your goods and will rank with all unsecured creditors.
It is essential that companies with a book of debts implement a clear debt collection procedure that is strictly followed. Your customers will
soon learn that you need to be paid first.
Poor habits from you lead to poor payment habits from your customers. An effective debt collection process will maximise the chance of receiving
payments from customers in a timely manner.
KNOW YOUR CUSTOMER & DO CREDIT CHECKS
A key to good cash flow is information.
Perform credit checks on all new and non cash customers. This process can immediately reduce bad debt, since you’ll stop offering credit
to customers who haven’t proved they deserve it.
CONSIDER CREDIT INSURANCE
Understanding whether the customer is a company, individual or trading trust is essential to ensure the correct person has signed contracts
and guarantees and so that debts can be collected. There are many free tools available to obtain information on customers (ranging from
Google and LinkedIn to ASIC and Court searches) all of which will assist in making informed decisions about customers.
Today’s business environment often mandates that small companies go global, but conducting business with trading partners overseas can be risky.
Credit insurance can help mitigate those risks by protecting the value of your receivables.
Credit insurance can be used on a case by case basis, for example, with new customers whose payment histories you’re unfamiliar with. Once you’ve
established a more solid relationship with them, you can then stop charging them for credit insurance.
WHAT CAN YOU DO TO OVERCOME A CASH FLOW SHORTAGE?
If your business has a temporary lack if cash, then here are some strategies to consider:
ClarkeKann is a commercial law firm with offices in Brisbane and Sydney. Our expertise covers commercial & corporate transactions, employment & IR, financial services, litigation, risk management and insolvency, property transactions and resources projects, across a range of industries. For a full list of our legal services, please visit our website at www.clarkekann.com.au
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