Managing your cash flow as a small business
For Aussie start-ups and SMEs the first couple of years of business can be a rollercoaster when it comes to cash-flow. From feast to famine and back again, getting a good cash flow strategy in place is crucial to ensuring your financial security and laying the foundations for future growth.
Any strategy will need input from ops, finance and accounting angles, but in this post we set out some of the key legal considerations on cash flow management. Lawyers can help you with each stage of the cash flow cycle. We will cover: financial DD, invoicing formalities, your terms and conditions and debt recovery.
Why you should perform due diligence on your potential clients
In order to reduce the danger of financial issues and maintain the stability of your start-up or small business, you should consider performing financial due diligence on your clients (especially for larger accounts). Financial due diligence basically entails assessing the client’s financial stability and health to work out if they’ll be able to pay your bills. Small businesses can use due diligence to make well-informed choices on whether to work with a specific client.
When performing financial due diligence on clients, small businesses and start-ups should take a variety of legal matters into account. The client's creditworthiness is one of the first elements to be taken into account. This entails assessing the client's financial accounts and credit history to ascertain their capacity to make on-time debt payments. Small enterprises should also take into account the client's long-term financial prospects as well as their current assets and liabilities' stability. There are a number of commercial providers of these services (for example, Equifax and Experian) and you will need to pay to use their resources.
Small firms should also think about the reputational risks connected to working with a specific client. This can entail assessing the client's standing in the sector and any potential issues with public relations. Generally, small businesses will need to limit themselves to internet searches to confirm the client’s standing, but as you grow you may consider partnering with a PR agency and get them involved in this process.
What do I need to include when issuing an invoice?
A business will issue an invoice to make a formal request for their client to pay them for the goods or services they've provided.
An invoice must adhere to specific legal standards in order to be valid in Australia. The invoice should include:
the Australian Business Number of the supplier,
the words “Tax Invoice”,
the name and contact information of the issuing organisation, and
the name and contact information of the client,
the number and cost of each item,
a clear description of the goods delivered or services rendered.
Along with these fundamental specifications, the invoice should also state the terms of payment, such as the deadline and any potential late fees or interest . Additionally, the invoice should list any applicable taxes, such as the GST, and state whether they are part of the total amount owed or must be paid separately.
It’s a good idea for your invoice to also include reference to any key contractual terms and conditions, such as warranties or return guidelines.
By including the above components, you can make sure the invoice is legitimate and that the interests of your business are protected.
What to include in your standard terms and conditions
Small businesses and startups should have standard terms and conditions in place to safeguard their legal interests and establish clear expectations with their clients. The key legal terms to include are set out below.
The description of the products or services being offered is an essential clause to include. This should include any specifications or demands, as well as a thorough description of the products or services being provided. If you usually put this in a quote or email, then consider referring to that quote in your terms and conditions and provide for the two documents to be incorporated to form a single legal agreement
The terms of payment should also be mentioned in your terms and conditions. This should include any deposits or up-front payments that could be necessary, as well as how and when payment is to be made. Additionally, any late penalties or interest that might be assessed for late payments should be specified.
Australian start-ups and small businesses should also specify agreements for ownership and delivery of the products or services (and any IP). This should contain information regarding the timing and mode of delivery of the products or services, as well as any ownership or ownership transfer clauses.
A limitation of liability provision is an additional crucial clause to include. This can help to shield your small business from being liable for losses or damages that go beyond the scope of the supplied goods or services.
Finally, small businesses should add a paragraph that outlines the laws that will apply to the agreement and the court that will have jurisdiction over any issues.
Businesses can safeguard their interests and establish clear expectations with their clients by incorporating above clauses into their standard terms and conditions.
Understand your debt collection options
Even after completing due diligence and having your terms and conditions in order, you might still run into issues with clients who can’t (or wont) pay your invoices. Therefore it's really important for Australian small business owners to have a strategy in place for collecting overdue debts. Small businesses in Australia have access to a variety of debt recovery alternatives which we discuss below
As a starting point, you should consider issuing a letter of demand for payment of the. In a formal letter of demand you need to set out: the amount of the debt that is owed, the reasons for the debt, and a request for payment within a certain time frame. Sending a letter of demand will formalise your request for payment of the outstanding invoice.
If a letter of demand fails to recover the debt then one choice is to work with a debt collecting company. On behalf of the small business, a debt collection firm can handle the procedure of recovering unpaid debts. There are a number of commercial operators in this space and many will work on payment terms where their fees are only due when the debt is recovered. Be aware that debt collecting activities are strictly regulated in Australia and if the client disputes that the debt is owed then the collection agency likely will have limited options to pursue the debt unless you take legal action.
If debt collection fails then you will need to consider commencing legal proceedings to recover the debt. You should speak to a dispute resolution lawyer to get further advice on how proceedings should be commenced and the costs of doing so. Even though taking legal action can be expensive and time-consuming, it could be necessary to reclaim the unpaid debt.
Small businesses may also be able to work out a payment arrangement (e.g. a portion to be repaid over the next six months) with the debtor in addition to the above choices. This may be a successful strategy for collecting the debt in the long run without resorting to expensive litigation.
In Australia, small businesses have a variety of methods for collecting unpaid debts. They include writing a demand letter, hiring a debt collection company, filing a lawsuit, and working out a payment arrangement. Small business owners can efficiently manage their debts and safeguard the financial stability of their company by being aware of these possibilities and selecting the one that best suits their needs and resources.
If you are interested in discussing any of the above issues in further detail then please reach out to a member of the Dexterity Law team, our details are available via this link.
The above article was written by Pippin Barry (BA, JD - 2012, The University of Melbourne), an Australian Legal Practitioner, and Hyein Kim, paralegal.
