Many business owners are unaware that income tax is payable on sales revenue, regardless of whether the related invoices have been paid. In other words, unless you’re reporting on a cash basis, you may be taxed on outstanding debtors — even if the cash hasn’t hit your bank account.
To reduce the risk of paying tax on unpaid invoices, it’s essential to implement effective credit control procedures. The following are practical and proactive debt collection strategies to help improve your cash flow and reduce aged receivables:
- Establish and communicate clear payment terms at the point of sale.
- Ensure written acceptance of your Terms of Trade prior to commencing work.
- Consider including personal or director guarantees within your payment terms.
- Request a deposit prior to starting the job.
- Issue invoices promptly.
- Consider tightening payment terms to 7 days or payment upon delivery.
- Simplify statements by showing only two columns: Current and Overdue.
- Automate reminder notices and follow up immediately after the due date.
- Delegate debtor follow-up to someone other than the business owner to ensure objectivity and consistency.
- Keep written records of customer payment commitments and hold them accountable.
- Engage a debt collection agency early — aged debt becomes harder to recover over time.
- Place credit holds on clients who are consistently overdue.
Review your current receivables procedures. Which of these strategies have you implemented, and how consistently are they applied? Don’t allow overdue debts to accumulate — take action now to strengthen your credit control processes.
“It’s the squeaky wheel that gets the oil.” – Anonymous
