Category Archives: Money

Credit risk management process

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Whether you’re a long-time credit controller, a new business owner, or a seasoned finance manager, a clear, consistent credit risk management process is key to doing more business, with the right customers, and getting paid faster.

Benefits of a proper credit risk management process

An effective, well-designed credit risk management process will save you time, deliver your customers a better experience, increase employee satisfaction, support compliance with government regulations, protect your assets, and help secure your cash flow. With an efficient credit risk management process you can do away with the ambulances at the bottom of the credit cliff. Any issues should be quickly identified as they crop up, giving you the opportunity to proactively manage your risk exposure.

What does an ideal credit risk management process look like?

So, you’re sold on building a proper credit risk management process, but unsure of what one actually looks like. Underpinning an ideal credit risk management process is exactly that – a process. Map out all the steps a customer takes as they journey through your purchasing process. From everything they must do to become a customer, to the steps you take to collect repayment for the goods or services provided. Once you’ve written them all down, you should be able to group them into the following overarching customer relationship stages:

1. Onboarding

2. Account management

3. Receivables

Onboarding:

The goal of the onboarding stage of the journey is to ensure you start your relationship with customers with eyes wide open and having completed a thorough risk assessment. This stage is where you gather all the decision-making information you need to onboard them as a customer, complete a credit assessment and do due diligence checks. And, if successful, set the tone for the relationship going forward with appropriate credit terms.

This is also a key area impacting customer experience – fast, easy onboarding can make all the difference in creating the right tone for a productive, respectful relationship. Key onboarding steps include:

· Gathering customer information for credit applications

· Identity verification

· Credit history checking

· Reviewing payment default data

· PPSR check and registration

Account management:

Account management is like your ongoing homework. You’ve moved past the new customer honeymoon period and now your sales and marketing teams are likely working hard to keep them engaged and making repeat purchases.

This is the time where a strong credit risk management process comes into its own. Being proactive is the difference between a credit team that ticks the boxes and one that is gold standard. Proactive monitoring of your customers so you’re aware of real-time changes in a customer’s creditworthiness or risk of default can have a significant impact on profitability and getting paid. Being agile here and acting on real-time knowledge is crucial – when a customer’s credit score changes, their credit limits or your credit policy should adjust with this. Core steps on your checklist here should include:

· Routine credit rating monitoring

· Setting up automated rules to be alerted when a customer’s risk profile changes

· Regular health checks of your credit portfolio

· Mitigating risk by amending credit terms as required

Accounts receivable:

Crunch time. If all has gone well, then the accounts receivable stage of the journey should be transactional – job completed, invoice sent, payment received. Unfortunately, for a variety of reasons this is often not the case.

However, strong credit risk management can go a long way to smoothing this part of the journey for both businesses and customers and ensure payment is collected in a timely manner. Building in automation to this part of the process can save you valuable time. Cash flow can be better protected with easy debtor prioritisation based on real-time debtor risk and trade payment insights. An ideal credit risk management process should include:

· An automated accounts receivable management system

· Debtor risk insights

· Trade payment insight

· Templated, consistent collections communications

How do you know if your credit risk management process is a good one?

There are clear signs that you have built, and are running, an effective credit risk management process:

ONE: Fast, easy onboarding

Having a good process will speed up new customer set-up. Doing business with you will be easy for customers using an online application form. And, with all the customer information you need to hand, you’ll complete due diligence faster. Customer credit decisions will be equally quick and easy, with your tools doing the hard work, making credit recommendations to you based on criteria you’ve previously set.

TWO: Real-time creditworthiness monitoring

A robust process will have automation baked in. Real-time alerts will let you know if a customer’s potential risks or probability of default has changed, or if an adverse event has been logged against them. Taking it one step further, the true value of this stage of the process is action. With real-time credit risk knowledge to hand, your credit terms will be adjusted as required to mitigate risk more effectively.

THREE: Minimal manual accounts receivables tasks

No sticky notes reminding you to call a customer on a particular date. A well designed, effective credit risk management process will reduce the amount of manual receivables tasks you are burdened with. Automation tools that form the foundation of your process will prioritise who you need to chase day to day. They’ll remove the juggle between systems with all financial information, customer contact information and communications history in one place. Chasing customers should be faster and only those extremely tricky debtors should require human intervention. Bottom-line, you’ll be getting paid faster.

How’s your process looking?

If you’ve read this article and have a few lingering questions about your own credit risk management process, now is the time to act. Not sure where to start? Map out your current process. Identify the areas that causes the most pain or are particularly hard for customers to navigate.

Some questions to ask yourself are:

· Do you use the PPS register?

· Can you quickly and accurately register assets on the PPS register?

· Are your customer application forms digital or paper?

· Have customers raised concerns or frustration with the steps they must complete to start trading with you?

· Are you automatically alerted to changes in customers’ financial situations?

· Do you have a consistent, automated accounts receivable process?

· Is chasing payment a series of time-consuming, manual tasks for you?

Contributed by Patrick Coghlan, CEO, CreditorWatch

Growing Your Business on a Budget

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With the cost of living affecting the budgets of households across Australia at the moment, small businesses are also struggling when it comes to growing your business. Inflation is rising, if you’re lucky enough to find staff you’re now having to pay them more, government support schemes have ended and business insolvencies are once again on the rise. Just as families are tightening their purse strings, now is also the time for SMEs to re-evaluate their spending.

It’s a tough time for small businesses and it can be quite challenging to keep going when you’re on a tight budget. It’s a harsh environment to try and achieve growth.

But with planning and a bit of strategy, it can be done. These are my top tips for running and growing a small business on limited funds.

Break Down That Budget 

Every business should have a planned budget each month with every cent that goes in and out recorded. This is critical to building accurate cash flow forecasting so you know your exact expenditures and revenue. It allows you to make better business decisions and be able to plan ahead for future operations with confidence.

A clear budget and overview of your monthly position means you can easily identify what items are necessary for repurchasing and what expenses could be removed that are not worth keeping.

A good budget also helps at tax-time – making the filing process smoother

Slashing Expenses

To find more money for growth you’ll have to cut back in other areas. Employee and office expenses can be a good place to start. Hire a full-time employee only when you need to. Freelancers are an option worth considering – they can do ad hoc tasks for your business such as managing websites, creating content, running ads etc.

You could also reduce your office expenses by moving your operations online and in the cloud, taking advantage of technologies in digital services and other supply chain operations and efficiencies such as dropshipping. Consider working from home more and sharing a flexible office space instead of paying full rent.

For new equipment, consider delaying purchases until you’ve done your research. Often, your business banker may refer to you other businesses that are looking to offload the assets you need.

Investigate Your Financing Options

When it comes to funding many business owners default to a bank loan but in the current climate it’s a lengthy process. Consider alternate funding options which may provide your small business with more freedom. Invoice financing is a great choice for B2B SMEs as it doesn’t look at your assets or debt, rather your monthly cash flow. Lenders will buy your unpaid invoices in advance to fuel your current business operations. An invoice finance facility allows you to access up to 90% of your outstanding invoice value upfront as cash in your bank account. The remaining amount is paid when your customer pays the invoice – minus a small fee.

For many small businesses alternate funding options with fewer hurdles to jump through end up providing them with the funds faster than the banks allowing for efficient cash flow. 

Be Clever about Marketing

There are big dollars to be saved here if you’re willing to do the work. Market smartly by keeping a close eye on where your customers are online. Are they on Facebook, Twitter, Instagram or LinkedIn? Do your research to see which of these platforms is most often used by your target market.

Use social media to post regularly, update your customers about your offers or simply engage with them. Local listings like Google My Business can enhance your visibility online so your business comes up in searches.

Don’t underestimate word of mouth. Reviews from real people, whether online or offline, are good for gaining publicity and trust. Ensure you generate positive reviews by providing excellent customer service and products.

Update Your Digital Infrastructure

If you’re still faxing documents or sending letters, it’s time to get with the times. Almost every business can benefit from free digital tools. Get all your staff onto a professional email setup using Google GSuite or Outlook: it’s cost-effective and will save you time and headaches.

File sharing and other tools are also essential, especially with an increasing number of staff working remotely and online. Your accounting function should also be in the cloud, and your invoices sent digitally.

Making your business operate more efficiently leads to greater productivity which is what you want for growth.

Build Relationships with Other Businesses

Don’t be afraid to connect with other businesses – chances are they’ll have something to teach you and vice versa. It costs nothing to invest in a relationship with other SMEs, and you create the potential to generate new customers, eventually increasing your revenue. Consider collaborating with businesses for events, cross-promotions or have a bundle offer with complementing products.

That old saying Rome wasn’t Built in a Day definitely applies in the current business climate. Start with making small changes and manage your expectations. With a bit of creative thinking and forward planning, you’ll be able to ensure that in this difficult time your business not only survives but thrives.

By Angus Sedgwick, CEO of OptiPay

For more information on invoice financing check out OptiPay

EFTPOS accepting credit cards

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Depending on the type of business you are running or planning to start, it is important to make it as easy as possible to receive payment in a face to face scenario.  You have two main options today, which are cash or credit card.  In the future, we will see other money transfer options driven by smartphones, but today we will focus on credit cards. You will need an EFTPOS solution (Electronic Funds Transfer at Point Of Sale) to facilitate this. This guide looks at what is involved in offering EFTPOS in your business.

An EFTPOS terminal or machine is an electronic device that assists in transferring funds from a customer’s bank account to your business bank account. To pay at an EFTPOS terminal, your customers must have an EFTPOS card, Debit Card, or Credit Card. You can also load the identity of your credit card onto your mobile phone and use that as a tap solution with an EFTPOS terminal. The EFTPOS solution does need the internet to function. The transaction settlement into your account normally occurs the same day or overnight.

WHY is EFTPOS easier?

EFTPOS is a convenient form of paying for the consumer as they do not need to carry cash. Indeed modern solutions don’t even need a card to be carried with payment able to be done from a watch, phone, or even a ring.

The merchant (you) reduces your need to have cash, less change, fewer security concerns, fewer visits to the bank, less counting, etc.  Instead, money is quickly transferred, and the time taken to tap & go a card is significantly quicker than other methods allowing you to move on to your next customer faster.

One might also argue that using EFTPOS makes a customer less concerned about cost as a tap is more vanilla than counting out notes.

WHAT EFTPOS fees are there?

EFTPOS Solutions are available from different providers, including banks and independent software developers. Some providers offer a flat fee, with other fees applied to each payment option, so it is worth shopping around. Any of the following fees may apply:

  • Price per month. A set fee that will be charged per month up to a certain dollar value of card transactions, after which you will be charged a fee as a percentage of every purchase over that dollar value.
  • Credit card authorisation fees. These are fees charged when an inquiry is made to ensure funds are available on a card before a transaction is processed.
  • Credit card service merchant fee. This fee may be charged by the bank when you process a credit card and is generally expressed as a percentage. Some cards have higher fees than others, like American Express.  It is your decision about which cards you will accept. Some retailers choose to pass this fee onto their customers, but there is government restriction as to how much you can pass on. https://www.accc.gov.au/consumers/prices-surcharges-receipts/credit-debit-prepaid-card-surcharges.
  • Payment terminal and account fees. You may be charged fees for administering your account, installing your payment terminal, or establishing your account. Establishment fees, cancellation fees, and equipment fees may also apply.
  • Chargeback fees. If the cardholder disputes a credit card transaction, you will be charged a fee.
  • Terminal access fee. This is a rental fee for providing and maintaining your EFTPOS terminal.
  • Debit card fees. You may be charged fees for processing debit purchase transactions or for a customer getting cash out at an EFTPOS terminal.
  • Sign up offers. Rental fees or others may be waived for the first x months of operation.

HOW do I pick which EFTPOS terminal is right for me?

EFTPOS terminals can come with several different features to consider when deciding which provider to choose:

  • Portable payment terminals. Not all terminals need to be plugged into a power point, and a portable unit has a battery and uses the mobile phone data network to transact.
  • Connect to a smartphone. This is a device that will connect to your smartphone physically or wirelessly. It allows the credit card to be tapped or inserted to complete the transaction via an app on your smartphone.
  • Payment options. Refers to what payment methods can/will accept Visa, MasterCard, American Express, Union Pay, Diners Club, Apple pay, Google pay, JCB, or Alipay.
  • Insights and analysis. Results and analysis of sales can be done via the terminal.
  • Settlement time. This is how quickly you will see the money in your bank account.
  • Email receipts. The option to email customer receipts rather than giving printed receipts to customers.
  • Receipt printer.  The option to physically print a receipt. It is normally done on heat-sensitive receipt rolls.
  • Terminal location.  The ability to store the GPS location (address) of where the transaction took place.
  • Accounting package.  The ability of the EFTPOS solution to be integrated into your accounting package.  This simplifies backend accounting procedures.
  • Customer Service. This can be telephone support through to a replacement of a terminal.  Make sure you also check the operating hours.

HINT

Beyond the major banks, we also recommend you compare a company called Square which sells a solution you can pick up at Officeworks and have running in minutes via your mobile.

It is also possible to make EFTPOS payments via most accounting packages without needing additional hardware. Note this will require all card details to be entered manually.

SUMMARY – Show me the money!

EFTPOS does not require you to go to the bank or keep cash secure, and the money will be available the next day.  Tap and Go facilities and mobile solutions mean you can collect payment quickly anywhere you can get mobile or internet coverage.

Bad debt – How to avoid it!

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You gave your customer 30 days to pay, but now 60 days have passed without payment. Maybe there is a dispute. Are your cash reserves running dry because the invoices are not being paid? This guide will look at the importance of worrying about getting paid on time and how you can chase up and avoid bad debt.

Bad debt occurs when the payment of an invoice is estimated to be uncollectible. Bad debt is a contingency that must be accounted for by small businesses that extend credit terms to customers when they issue an invoice, as there is always a risk that payment will not be received.

WHY should I worry about unpaid invoices?

It does not matter if it is your best friend that has not paid you or it is a large corporation. If you cannot collect payment promptly, it will affect your cash flow and profitability, and your business will suffer. This situation is further compounded if you have already paid your costs associated with the invoice, such as materials of wages. Essentially you are lending money to your customer, and if you do not have the cash flow yourself, you may be paying interest on a bank overdraft/loan until this invoice is paid, further eating into your profits.

WHAT can I do to prevent bad debt?

When deciding to offer credit to customers, any action you can take upfront to reduce the chance of bad debt is a much simpler process than collecting money from someone who does not want to or cannot pay you.

To prevent bad debts and protect your business ideally you should:
  • Only send out goods or provide services after customers pay their bill
  • Provide simple and clear payment options
  • Invoice customers quickly and properly
  • Give discounts for paying on time or early
  • If you intend to provide credit you should research the customer:
    • Do a credit check (try Equifax, Onedeck or creditorwatch) and ask the customer for references
    • Create a business contract with clear terms and conditions using the help of legal advice
    • Set up effective payment terms
Have a process to manage payments and debt recovery, a good accounting package will help with this:
  • Check contract terms to see when payments are due
  • Ensure you have the right contact details
  • Contact the customer in writing to request payment
  • Keep records of all customer correspondence
  • Set up regular payment reminders (some accounting packages will have an automated system for this)
  • Telephone the customer
  • Send a formal letter of demand

Most important is to create sensible limits on the credit you offer to your customers that they will be able to repay easily.

To prevent bad debts, a factoring company will buy your outstanding invoices from you for a reduced cost and then chase up the debt themselves. It is a fast way to get cash but at a high price as they take on the bad debt risk. (It is unlikely they will not just buy the bad ones)

HOW to deal with bad debt?

The first step is to understand the cause of the debt:
  • How long has it been outstanding?
  • How much is owed?
  • What is the invoice for?
  • Is the invoice disputed?
  •  Is the debtor still trading?
  • How long have you been doing business together?
  • Does the debtor have a history of late payment, is this different to normal?
  • What credit agreement do you have with them and did they sign a Director’s Guarantee?

The sooner you take action to recover your overdue debt, the more likely you will recover your money.

If a customer has not paid you after various attempts, you must decide if the debt owed is worth the additional effort to collect it. For example, $100 is possibly not worth it, but $10,000 is. You must consider your time and cost to recover as well as the likelihood of the debtor paying.

The following avenues can help recover debt:
  • Debt collection agencies – will attempt to collect the debt on your behalf for a percentage of the debt owed.
  • Legal action – a lawyer can issue a lawyers’ letter of demand or start court proceedings.  An online letter service is relatively cheap but going to court is not, however, the recovery costs can be added to the debt.  Court proceedings will enforce an outcome and affect a debtor’s credit rating.
  • Small claims tribunal – provides mediation and a legally binding solution without having to involve lawyers and courts. Is good for resolving disputes. https://www.accc.gov.au/contact-us/other-helpful-agencies/small-claims-tribunals
  • Court – courts will decide on disputes where the amount owed is too high for a small claims tribunal. Consider using a lawyer if your case goes to courts as procedures are more formal and complicated.
  • Community legal centres – can assist with letter writing and filling out court forms https://clcs.org.au/
  • Small Business Commissioner or Ombudsman – advice on how to recover debts and subsidised or low-cost dispute resolution https://www.asbfeo.gov.au/disputesupport

As a small business, you can also take out Trade Credit Insurance which allows a business to insure themselves against bad debts.

As a business owner, you should consider some sort of provision (put money aside) for bad debts, and this is essentially self-insurance. From an accounting perspective, unpaid bad debt can be an allowable deduction as long as it was included as assessable income in the present or even a previous income year and that it is written off as “uncollectable” in the same year that a deduction is claimed.

HINTS

Unfortunately, some scammers ask your clients to pay your recent invoice into a new bank account, being the scammers’ account. Ensure your clients understand that you would not change your payment details, and in the unlikely event you did that, there would be a very clear and robust process in writing and over the phone.

If the business you are dealing with is in administration, liquidation or deregistered, they may not have the ability to pay you. Check whether a company is in liquidation or deregistered on ASIC Registers. https://asic.gov.au/online-services/search-asics-registers/

Let your customer know you plan to take legal action or use a debt collector. This may have an effect without the cost.

SUMMARY – fast action to recover debts

If you decide to offer credit to your customers, you can find yourself in a situation where a customer is refusing or cannot pay your invoice. This is known as bad debt. It is best to have a plan to avoid bad debt, but if it occurs, fast action brings the best results. Your best chance of recovery after your efforts have failed is via a small claims tribunal, using a debt collector or the services of a lawyer.

Buy Now Pay Later (BNPL)

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Let’s say you have a customer interested in your product or service, but they don’t have the money this week to buy it.  What can you do? Persuade them to use a credit card, or maybe you should offer a Buy Now Pay Later (BNPL) solution.  The best known of these today are Afterpay, Zip, and Humm. There are many new players, including PayPal, MasterCard and Commonwealth Bank. Although this appears to be free, nothing is ever really free, so let’s discuss. This guide will help you understand and decide if you want to offer Buy Now Pay Later.

In a sense, customers have for years had this option through a credit card. You do not incur a charge as long as you pay the balance off at the end of the month. However, some consumers find it hard to get a credit card or have realised how easy getting themselves into debt is. Thus the buy now pays later explosion has occurred in Australia.  It is a new type of layby where you get the goods immediately rather than waiting for all outstanding money to be paid. The amount that can be financed is usually low compared to other forms of credit.

Buy now pay later works by a 3rd party financer providing credit to a consumer so you, the small business, get paid straight away.  The consumer walks away with the good or service and then must repay in regular instalments. If the consumer does not miss a payment, then they pay no interest. The 3rd party financer makes money from charging you a transaction fee and from charges to the consumer if they fail to pay on time. Note other charges may apply from the financer.

WHY should I offer Buy Now Pay Later (BNPL)?

The benefits for your business:

  • Customer may spend more or make a purchase that may not have happened
  • Customer repurchase rate may be higher
  • You get your money straight away with no fraud risk
  • The process is all automated so there is little paperwork and there is the ability to process refunds

WHAT do you need to know about BNPL fees and charges?

The downside of this method of payment:

  • The % charge per transaction is much higher than an EFTPOS payment (up to 3 x at time of writing)
  • Unlike a credit card, the customer must already have a credit in their buy now pay later account. So for example, if spending $100 must have $25 credit
  • There may be an additional transaction fee per sale
  • If consumers fail to follow the terms of the BNPL provider they may wrongly blame you for additional charges.

HOW do I decide which BNPL vendor?

What you should consider before selecting BNPL vendors:

  • Will you offer more than one solution?
  • Will the solution integrate into your existing POS, accounting, or eCommerce solution?
  • What is the reputation and take-up of each BNPL vendor? Consider the largest vendor will have the most registered consumers
  • Will the available maximum sales amount cover what you are selling?
  • How quickly will you be paid?
  • Is there a per transaction fee?
  • What percentage fee do they charge per transaction?
  • Can you reach additional customers by BNPL supporting your business?
  • What are your competitors doing in the BNPL space?
  • Is there any lock-in contracts?

HINT

If what you sell is below $50 in cost or more than $1,000 this might not be the right solution for you.

SUMMARY – Research Buy Now Pay Later (BNPL)

You need to evaluate the different providers and decide if the additional cost of selling is worth the extra business by offering a BNPL solution.

Bank account for small business

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You have started your new business, you open your wallet and pull out some cash, and you wonder is that my money or some petty cash from my business?  Even if you have chosen to be a sole trader it’s a great idea to open a bank account, if you are any other business structure you must have a business bank account for tax purposes.  Once you do it opens up the ability to articulate which money belongs to you and which to the business. This guide will help you understand the benefits of having a business bank account and help you understand what you should consider in selecting an institution.

A bank is a financial institution that accepts deposits and recurring accounts from the people and creates demand deposit. Lending activities can be performed either directly or indirectly through capital markets.
Wikipedia

WHY have a separate Business Bank account?

When running a business you must keep account of business transactions and a bank account is a great way to have an auditable paper trail.

A separate business bank account will help you to:
  • Clearly show your business finances separate from your personal finances
  • Analyse your cash flow
  • Monitor your business income and expenses
  • Extract information needed to meet your tax and reporting requirements
  • Get detailed records of your business transactions. These can be downloaded to a spreadsheet or imported to an accounting package.

WHAT else can you do with a Business Bank account?

If you have a credit card attached to your business bank account and do most of your transactions through your credit card, your bank statements will, in effect, be a checklist of those expenses.

Some banks offer overdraft facilities, essentially providing a loan facility to go into a minus balance.

To open an account you will need an ABN and ID documents of an authorised owner or director of the business.

HOW to choose a business bank account?

So which bank should you choose? In fact you may not choose a bank, it may be a building society or credit union.  The answer is the one that suits you best and you should consider these points when making your decision:

  • What are the fees and charges?
  • Do they offer merchant facilities like EFTPOS?
  • Are their interest rates competitive if you need to borrow?
  • Do they cater to the needs of small businesses and do they have offers/solutions to suit?
  • Is there a local branch in case you need to visit? 
  • What is their online banking interface like and will it integrate with your accounting package?
  • What information is reported on each transaction?
  • What security measures do they offer for online transactions to protect your business?
  • How fast do they transact instructions and until what time at night?
  • Do they offer foreign transfer arrangements and what are the charges?
  • Can you have access to your own bank manager or business banking specialist?

For more information and comparing various bank accounts visit
https://www.finder.com.au/business-banking

For taxation purposes, the ATO provides the following guide on record-keeping https://www.ato.gov.au/Business/Record-keeping-for-business/Detailed-business-record-keeping-requirements/Running-your-business—records/Banking-records/

Here you will find useful information such as the requirement to keep records for 5 years including the period of review.  For example, did you know that if you did your 2015 tax return in 2016 you would need to keep your 2015 tax records until 2021.

HINTS

Regularly bank all the cash your business receives so your income and expense information is always up-to-date and you can easily reconcile your accounts and analyse your cash flow

Register for online banking – this may simplify your record keeping and bank reconciliation process as you can:
  • easily get detailed records of your business transactions
  • download financial information from your online account to your accounting package
  • identify extra transactions in your account including bank fees or interest charges, and direct debits and credits
  • check and record any errors or omissions
Regularly reconcile your bank records, which may help:
  • you be more confident that your records contain all the information you need to prepare your tax return and activity statements
  • you to better understand your cash flow
  • reduce the time it takes to prepare your activity statements or tax returns

SUMMARY – Small Business Banking

Unless you are a sole trader you must open a business bank account.  It will help you manage your finances and different providers will have an offer to suit your needs.  Always check to see what other services the bank may be able to offer your business.

A handy comparison of bank rates and fees is available here to help you compare. https://www.finder.com.au/business-banking