Our latest episode of Business Insights is the second in a three-part series on how SMEs can best prepare themselves for uncertainty using the 3 Ps of preparation: processes, policies and procedures, and protection.
Our guest for the series is an expert in helping businesses with best-practice preparation: Natalie Ledlin, Solicitor Director at Ledlin Lawyers.
In our second episode on policies and procedures, Natalie takes us through setting up payment terms, credit policies and limits, and collection procedures, as well as prioritising payments and ensuring privacy of data.
Contact information: firstname.lastname@example.org
Hello and welcome to the latest episode of Business Insights. I’m Michael Pollack, Head of Content at CreditorWatch and I’m joined again by Natalie Ledlin, Solicitor Director at Ledlin Lawyers. How are you going there, Natalie?
I’m good. How are you Michael?
Fine thanks. Thanks for joining us once again. Okay so this is the second episode in our three-part series on the 3 Ps of preparation to help small businesses safeguard themselves in this uncertain trading environment that they find themselves in.
Thank you for having me.
We’ve spoken before about the effects of the pandemic, like supply chain disruptions labour shortages and, more recently, the impacts of the East Coast floods and the war in Ukraine. Natalie, could you just briefly remind our listeners what we covered off in our first episode and what our second P of preparation is today?
Yeah, definitely. Thanks Michael. So, last week in our first episode we looked at our first P, which is process. We looked at what you need to do when you are onboarding your customer and the processes that you should have in place to make sure that you get all of the right information from your customer to enable you to properly trade with your customer.
Our second P of preparation today is going to be procedure and policy, and that’s going to be focused more around, once your customer is actually on board with you, you’re selling to them or that you’re hiring to them, you’re supplying to them and how do you protect yourself during that process. It’s no longer about getting the customer on board. You now have the customer. And how do you protect yourself while you’ve got them?
So, Natalie, what are your top tips for making sure that businesses have a best practice credit policy in place?
Well, I think the first thing Michael that you need to ask yourself is, do I actually have a credit policy? If you don’t have one, it’s a really good idea to get yourself one. Maybe you don’t have anything formal written down but you’ve probably got lots of years of experience and you’ve probably got some things that you normally do regularly as a matter of course.
So, get those things written down, get them shared with your team. Best practice is to actually have a formal credit policy implemented. And when I’m talking about a credit policy, what I’m talking about is basically a risk management tool that’s going to help you outline your credit and your collection procedures. So having an effective written credit policy that everybody knows about is going to help you reduce your bad debts and any of your write-offs.
So, the sorts of things that you should be looking for in a credit policy is payment dates, credit limits, what are your follow-up timeframes for outstanding accounts, and what are your collection procedures? And of course, anyone in your credit team should obviously be trained in this and know what to be looking for. The other thing that I normally recommend is also have a chat to your sales guys about your credit policy as well because sales and credit usually go hand in hand. But, Often we find that the two teams don’t necessarily communicate with each other as often as possible. So it’s really good for the salespeople to know what the credit policy actually is.
Have a look as well at who can actually authorise credit limits, and requests for payment arrangements and increases in credit limits. You know who’s got the authority to do that? If a customer comes to you, how you’re going to process that request? And what sort of justification can you give for extensions of time to pay, which is probably something that lots of us have seen over the last couple of years.
Okay, thanks for that Natalie. So, you touched on outstanding debts and managing them. Could you just take us through what you’d recommend having in place in your credit policy to help with that and also avoiding preference claims?
Yeah, definitely Michael. So, for anyone who doesn’t actually know what a preference claim is, I might just explain that quickly. An unfair preference claim is a claim that’s made by a liquidator. So once a company goes into liquidation and is insolvent, if there’s been a payment that’s been made to you by that customer in the last six months, before that company entered external administration, there is a possibility that that payment will be clawed back by the liquidator as an unfair preference claim.
So, essentially the liquidator will be saying to you that you’ve received more in the last six months than you would have as an unsecured creditor in the liquidation. Now, I often hear credit managers saying that the unfair preference regime is really unfair to good credit managers because it really punishes them for getting out there trying to get their debts collected and getting the money in.
Often what I will say is it’s much, much better to just get as much money in as you can. The money is better off in your pocket than it is in the liquidator’s pocket, but there are some things that you can do to avoid being caught as a preference payment and some of those things we can incorporate into the credit policy as well.
So, for example often. You know a customer who’s struggling will come to you looking for a payment arrangement. We always recommend to avoid lump sum payment arrangements. So rather than saying I’ll accept $20,000 in $5,000 instalments, ask for invoices to be paid in full, starting from the earliest invoice and moving forward to the latest one. So don’t be accepting rounded lump sum payments. Get specific payment amounts, think about when you’re going to put your customer on stop or on hold; that can sometimes be an indication to a liquidator that perhaps you suspect that your customer can’t pay their debts as and when they fall due.
So have a think about putting a structure around when you put your customer on credit stop or on hold, when you accept payment arrangements and when you extend those payment dates, and you should also be reviewing this credit policy regularly.
I’ve actually used credit policies as evidence before in defending unfair preference claims to say to a liquidator, ‘Well here it is. This is my clients written credit policy. They allow payment over 60 days for example in certain circumstances and that’s exactly what they’ve done in this case”. So, having a really good written credit policy can actually be a really good tool in litigation and avoiding unfair preference claims.
Okay, great. Thanks for that. What about setting credit limits? What should people be aware of there?
Well, the credit limit usually is set when your customer first comes on board and normally what I recommend to clients is actually instead of referring to a credit limit, we refer to it as anticipated monthly purchase or anticipated monthly spend.
The reason why I always recommend that is because if you’ve got a director or an individual who’s given a personal guarantee, often I will find that they will use the credit limit as a means of getting out of paying.
So they will say, ‘well when my company came on board, I only agreed to a $10,000 credit limit. You’ve extended credit to $100,000 so the limit of my guarantee is only $10,000 which was the initial credit limit that you gave me’.
If we refer to it as an anticipated monthly purchase or anticipated monthly spend, you’re not locking the customer into a specific amount and it’s a lot easier to actually argue against that type of defence that a guarantor or director will often try to use to get out of paying.
If you have a customer who’s got a limit or an anticipated monthly spend and they are constantly exceeding that limit then it’s a really good idea to use the tools that you’ve got available to you to update the credit limit.
Have a look and see if there’s an issue because that is usually going to be one of the first signs, if they are constantly exceeding their credit limit. But it is always a good thing to have a chat to your sales guys as well because sometimes going over your credit limit can be a good thing. It could mean that your customer is growing.
So it’s a really fine line sometimes, and it can be a really difficult job to actually work out is your customer just in a growth phase or are they in trouble. That’s why it’s really good to communicate within your team and be referring back to some of the limits that you’ve set within your credit policy to make sure that you are keeping on top of your customers’ behaviour and making sure that you are not supplying too much to them and that you’re going to get caught out if they can’t pay their bills.
And of course CreditorWatch has some great tools for monitoring the activity of your customers when you’re setting credit limits as well.
Just finally, I think it would be remiss of us not to talk about the procedures for the protection of data, given that it’s more important than ever as the techniques of cyber criminals are becoming increasingly sophisticated. What procedures should businesses have in place to ensure that the electronic information, not only their electronic information but the data that they have on their customers and clients is secure?
I think we’ve moved well past Nigerian princes looking to pay you know 100 million dollars into your bank account. Now we have really, really sophisticated scams. So, you need to be making sure that you’ve got policies and procedures in place to protect the data that you’re holding.
So really, you are only as good as the staff who are implementing your procedures and making sure that the data is secure. You can get cyber security experts to give you some tips and to review what you’ve got, but there are also some really easy things that you can do yourself.
So, things like have you got passwords on your computers. Are you changing those regularly? Have you trained your staff not to click on strange looking links? Have you updated your malware software? Those sorts of things… if you’ve got insurance for cyber security.
Some of those things might actually be required to maintain that insurance policy so make sure you have a look at the wording of your policy and make sure that you’re actually complying with all of that. And make sure that you have in your terms and conditions and your credit application, which I think I mentioned in last week’s session, that you’ve got some information in there about how you address your privacy obligations and how you’re actually collecting, using and storing that personal information.
Great, thanks Natalie. Yeah, the unfortunate situation is that the experts say that it’s not if but when an attack hits a business. So it always pays to have those things in place.
Thank you again for another great podcast episode on how to people can safeguard their businesses in this uncertain trading climate.
No worries. Thank you so much for having me Michael.
It’s a pleasure. Now for more information on properly setting up your policies and procedures you can get in touch with Natalie at email@example.com or visit the website at ledlinlaywers.com.au, and we’ve included those details in the podcast description.
Thank you for listening. Natalie and I will be back next Wednesday with the third instalment of our three-part series on the 3 Ps of preparation for small business. This one is on protections. Don’t miss that one. Thank you again, Natalie and I’ll look forward to seeing you next week.
Catch the first episode in the series, on processes, here.