How to Minimise Bad Debts and Improve Cash Flow in NSW

Bad debt is the silent drain on many business cash flows. A few disciplined rules, applied consistently, can dramatically reduce your exposure — and free you up to focus on growing your client base rather than chasing payments.

A bad debt is an amount owed to your business that is unlikely to be recovered — typically because the customer is insolvent, has disappeared, or is simply refusing to pay despite being able to.

CLS Legal has been advising businesses and creditors in NSW since 2010.

Before you extend credit to a new customer, always have them complete a credit application and provide references. Depending on the size of the business and its expected spend, it may also be worth obtaining a credit report on the person or entity.

If dealing with a corporate entity, ensure your credit application includes a legally enforceable director’s guarantee. This must be completed and signed by each director.

• Require trade references — and actually check them.
• If a previously reliable customer starts paying slowly, review their credit application and recheck their references.
• If you have further doubts, call the directors directly and ask them to explain the change in payment pattern.
• If you are not satisfied with the answers, reduce their credit terms immediately.

Rule 2 — Start as You Mean to Go On

Your standard terms and conditions need to be clear, concise, and available to customers before you do business with them. Print them on every quote and invoice, and display them on your website.

• Never take on a customer you have heard is a slow or bad payer — unless you restrict them to pre-payment or payment on delivery (POD).
• If your credit terms are 14 days, someone should be calling on day 15 — especially in the early stages of the relationship.
• Far too many businesses accumulate bad debts because they worry that chasing payment will damage the relationship. It will not. Clear expectations set at the start protect both parties.