Published: November 2025
Poor debtor management is one of the fastest ways to destroy an otherwise profitable Australian business. You can have strong sales, healthy margins, and growing customer demand, but if cash isn't actually hitting your bank account, your business will struggle to pay wages, suppliers, and rent.
According to CreditorWatch, Australian businesses wrote off $4.7 billion in bad debts in 2023, with small to medium businesses disproportionately affected. The average Australian SME has 42 days sales outstanding in debtors, representing substantial cash tied up in unpaid invoices. For a business with $2 million in annual revenue, this typically means $230,000 sitting in accounts receivable rather than available for operations.
This article provides six practical strategies Australian businesses use to manage debtors effectively, reduce bad debts, and maintain healthy cash flow.
Many business owners focus on winning new customers and delivering great products or services, treating invoicing and collections as an administrative afterthought. This mindset creates serious problems.
- Cash flow impact: Revenue on your profit and loss statement means nothing if you cannot pay this week's wages or supplier invoices. Businesses with poor debtor management experience constant cash flow pressure despite appearing profitable on paper.
- Working capital constraints: Money tied up in debtors cannot be used to purchase inventory, fund growth initiatives, or take advantage of supplier early payment discounts. A Melbourne retailer with $180,000 in outstanding debtors has $180,000 less to invest in stock for the busy Christmas period.
- Bad debt exposure: The longer an invoice remains unpaid, the less likely you'll ever collect it. Industry data shows invoices overdue by 90 days have a 50% collection probability. After 6 months, collection probability drops below 25%.
- Relationship damage: Unclear payment terms and inconsistent collection processes create conflict with otherwise good customers. Professional debtor management maintains positive relationships while ensuring timely payment.
Many Australian businesses supply goods and services based on informal arrangements or verbal agreements. When payment disputes arise, there is no documented framework for resolution.
- Written terms of trade: Create a formal document covering payment terms (typically 7, 14, or 30 days from invoice), credit limits for each customer, interest charges on overdue accounts (usually 1.5% to 2% per month), and dispute resolution processes. Have customers sign acceptance before extending credit.
- Credit assessment process: Before offering credit terms to new customers, conduct proper due diligence. Request trade references from current suppliers and check those references. Review their ABN details and company information through ASIC. For larger credit limits, consider commercial credit reports from services like CreditorWatch or Equifax. Check for any court judgments or payment defaults.
A Sydney wholesaler implemented a formal credit policy in 2023, requiring signed terms of trade and reference checks for all new customers. In the first year, they declined credit to 12 applicants who failed reference checks. None of those declined businesses are still operating today. The policy prevented approximately $85,000 in potential bad debts.
- Credit limits aligned with customer size: Set appropriate credit limits based on the customer's business size and payment history. A new customer with no track record should have lower limits than a long-standing customer with perfect payment history. Review and adjust limits annually or when customers request increases.
- Existing customer considerations: Implementing new credit terms with existing customers requires sensitivity, especially long-standing relationships. Consider grandfathering current customers under existing terms while applying new policies to all new customers and any existing customers requesting credit limit increases. Alternatively, provide 90 days notice of changing terms, allowing customers to adapt.
How and when you invoice directly impacts how quickly you get paid. Australian businesses often underestimate the importance of invoice quality and timing.
- Invoice immediately: Send invoices the same day you deliver goods or complete services. Every day you delay is another day before payment arrives. A Brisbane tradie who invoices on the day of job completion gets paid an average of 12 days faster than one who invoices weekly.
- Include complete information: Your invoice must clearly show the total amount owed, payment due date based on your terms, customer's billing address, your bank account details for direct deposit, and any customer reference numbers like purchase orders or job numbers. Missing information gives customers an excuse to delay payment while they request clarification.
- Reference your terms: Every invoice should reference your formal terms of trade. Include a note like "Payment due within 14 days as per our standard trading terms. Interest at 2% per month applies to overdue accounts." This reinforces your payment expectations and provides legal backing for interest charges if needed.
- Make payment easy: Provide multiple payment options including direct bank transfer, credit card facilities, or BPAY for larger businesses. The easier you make payment, the faster customers pay. Include clear bank details and any payment reference numbers customers need.
- Statement accuracy: Monthly statements should clearly show opening balance, all invoices issued during the period, payments received, any credits applied, and closing balance owing. Include aging categories showing current, 30 days, 60 days, and 90+ days overdue amounts.
A Melbourne professional services firm reduced their average collection time from 38 days to 26 days by implementing same-day electronic invoicing with all required information and payment links. The 12-day improvement freed up approximately $95,000 in working capital.
Effective debtor management requires reliable systems and regular monitoring. You cannot manage what you do not measure.
- Accounting software setup: Modern cloud accounting systems like Xero, MYOB, or QuickBooks provide strong debtor management features. Set up your system to automatically send invoice reminders at 7 days overdue, 14 days overdue, and 30 days overdue. Generate aged receivables reports showing exactly who owes what and for how long. Create customer statements monthly for all accounts with outstanding balances.
- Weekly debtor reviews: Schedule 30 minutes every week to review your debtors report. Identify accounts approaching or exceeding terms, note any concerning patterns like gradually increasing days outstanding, and prioritise collection activity based on amount owing and time overdue.
Key metrics to monitor:
Days Sales Outstanding (DSO): Calculate by dividing accounts receivable by average daily sales. Lower is better. Australian SME average is 42 days.
Formula: (Accounts Receivable / Annual Revenue) x 365
Aged receivables percentage: Track what percentage of your debtors fall into current, 30 days, 60 days, and 90+ days categories. Healthy businesses have 80% or more in current.
Bad debt write-off rate: Total bad debts as a percentage of revenue. Australian SMEs average 1.5% to 2.5% depending on industry.
Example: A Perth distributor implemented weekly debtor reviews in January 2024. Within three months, their DSO dropped from 51 days to 38 days, freeing up $142,000 in working capital they used to negotiate better supplier terms and increase inventory for their peak season.
The single biggest mistake Australian businesses make is inconsistent follow-up on overdue accounts. Customers quickly learn which suppliers will chase payment and which will not.
- Documented collection process: Create a written process that everyone in your business follows consistently. This ensures no overdue invoices slip through the cracks and customers receive consistent treatment regardless of which team member manages the account.
Typical collection timeline:
Invoice date: Invoice sent immediately with clear payment terms.
Day 7: Friendly email reminder that payment is due in 7 days. Keep tone professional and helpful.
Due date: Second email reminder that payment is now due. Include a copy of the invoice.
Day 7 overdue: Phone call to the customer. Ask if there are any issues with the invoice and confirm payment date. Document the conversation and any commitments made.
Day 14 overdue: Formal written notice that the account is overdue, referencing your terms of trade. Clearly state interest charges are now accumulating. Place account on hold for new orders until arrears are cleared.
Day 21 overdue: Phone call to decision maker, not accounts payable clerk. Discuss payment plan options if the customer is experiencing difficulties, but require commitment to specific dates and amounts.
Day 30 overdue: Final demand letter via email and post, giving 7 days to pay before matter proceeds to formal debt recovery or legal action.
Day 37 overdue: Engage debt collection agency or solicitor, or initiate court proceedings for amounts worth pursuing.
- Make actual phone calls: Email is easy to ignore. Phone calls are much more effective for collection because they require immediate response, allow you to build rapport and understand the customer's situation, and enable you to negotiate payment arrangements or commitments on the spot. Most importantly, customers who know you will call are more likely to prioritise your invoices.
- Document everything: Keep detailed notes of every collection contact including date and time, person spoken to, what was discussed, commitments made, and follow-up actions required. This documentation is essential if matters escalate to legal proceedings.
- Stop credit immediately: When accounts exceed your payment terms, stop supplying on credit. Put the account on hold until arrears are cleared. Many businesses keep supplying customers who owe them money, compounding the problem. Use your leverage: customers need your goods or services.
A Canberra service provider implemented a strict collection process in 2023, including phone calls at 7 days overdue and account holds at 14 days. Their percentage of receivables over 60 days dropped from 18% to 4% within six months. Bad debt write-offs reduced from 2.8% of revenue to 0.9%.
Even with strong collection processes, some customers will default. Proactive risk management minimises exposure.
- Regular credit limit reviews: Review credit limits annually for all customers. Look for warning signs including gradually increasing payment times, increased order volumes that might indicate other suppliers withdrawing credit, rapid business expansion that can strain cash flow, changes in payment patterns or communication, and industry rumours about financial difficulties.
- Customer concentration risk: Avoid having too much revenue with any single customer. A common rule is no customer should exceed 20% of your revenue. If your largest customer defaults, can your business survive? A Brisbane manufacturer with 45% of revenue from one customer nearly collapsed when that customer entered administration owing $280,000. The lesson: diversify your customer base.
- Industry and economic factors: Understand which industries or sectors face economic pressure. If several customers operate in struggling industries, you face correlated risk. During COVID-19, businesses heavily exposed to hospitality or travel sectors experienced widespread defaults. Monitor economic indicators and news affecting your customer industries.
- Credit insurance: For businesses with large customer concentrations or high-value transactions, trade credit insurance can protect against bad debts. Policies typically cover 80% to 90% of invoice value if a customer defaults. Annual premiums range from 0.2% to 1% of insured turnover. This makes sense when you have large individual customer exposures or operate in high-risk industries.
- Stop supplying at first warning: When you notice payment patterns deteriorating or concerning business indicators, reduce credit limits or move to cash-on-delivery terms immediately. Do not wait until the problem escalates. Better to lose a marginal customer than accumulate large bad debts.
Example: A Sydney importer noticed one of their retail customers increasing order sizes while payment times extended from 30 days to 45 days. They reduced the credit limit and required partial prepayment for new orders. Two months later, the customer entered voluntary administration owing various suppliers over $2 million. The importer's exposure was limited to $18,000 versus the $95,000 it would have been without action.
Despite best efforts, some accounts will require formal debt recovery processes.
- Payment arrangement options: When customers cannot pay in full, structured payment arrangements can recover funds while maintaining the relationship. Require a deposit to demonstrate commitment (typically 20% to 30%), clear payment schedule with specific dates and amounts, signed written agreement documenting terms, and continued interest accumulation on outstanding balance. Stop credit for new purchases until the arrangement completes.
- Formal demand processes: Send formal letters of demand via email and registered post, clearly stating total amount owing including principal, interest, and any collection costs. Give a final deadline, typically 7 days. Reference your terms of trade and legal rights. State consequences of non-payment including court action.
- Court proceedings: For debts worth pursuing (generally $5,000 or more), court proceedings may be necessary. Options include small claims tribunals for debts under $10,000 (varies by state), magistrates court for larger debts, or engaging debt collection agencies or solicitors for commercial debt recovery.
- Cost-benefit analysis: Consider collection costs versus debt value. Court filing fees, legal fees if using solicitors, your time and stress, and likelihood of actually recovering funds even with judgment. Sometimes writing off small debts makes more financial sense than pursuing them.
- Secured creditor status: Where possible, structure large transactions with personal guarantees from directors, retention of title clauses in terms of trade, or security interests registered on the PPSR (Personal Property Securities Register). These provide priority if customers enter insolvency.
Example: A Melbourne wholesaler was owed $47,000 by a retail customer who claimed cash flow problems. They negotiated a payment arrangement of $10,000 upfront plus $3,000 per week for 13 weeks. The customer made all payments, maintaining the trading relationship. Without the arrangement, the business likely would have entered administration and the wholesaler would have recovered less than 20 cents in the dollar.
Tax deductions: Bad debts written off are tax deductible when the amount was previously included in assessable income, genuine attempts to recover the debt have been made, and the debt is genuinely irrecoverable. Document collection attempts and decisions to write off.
Provision accounting: Conservative businesses provision for expected bad debts based on historical experience. If you typically write off 1.5% of revenue as bad debts, create a provision for this amount. This smooths financial results and avoids unexpected profit impacts when write-offs occur.
When to write off: Write off debts when the customer has entered liquidation or bankruptcy with no likelihood of recovery, collection costs exceed potential recovery, or you have exhausted reasonable collection efforts and the debt is very old (typically 12+ months). Writing off does not prevent future collection attempts if circumstances change.
Construction and trades: Retention of title clauses are critical. Consider progress payment terms for larger jobs rather than full payment on completion. Use security of payment legislation rights when dealing with builders or head contractors.
Professional services: Require retainers before commencing work, especially for new clients. Bill monthly or at project milestones rather than on completion. Consider deposits for projects over $10,000.
Wholesale and distribution: Implement tiered payment terms based on order value and customer history. Consider consignment arrangements for new or risky customers. Use retention of title clauses consistently.
Business-to-consumer: Payment upfront or on delivery is standard for consumer transactions. Credit arrangements with consumers are high-risk and require additional regulatory compliance.
What are reasonable payment terms for Australian B2B transactions?
Standard payment terms range from 7 to 30 days from invoice date. Shorter terms (7 to 14 days) suit trades and services where cash flow is critical. Longer terms (30 days) are common in professional services and wholesale. Some industries like construction use specific payment timeframes under security of payment legislation. Choose terms balancing your cash flow needs with industry norms and customer expectations.
Can I charge interest on overdue accounts?
Yes, if your terms of trade clearly state interest charges and the customer agreed to those terms. Typical rates are 1.5% to 2% per month on overdue balances. You must document the interest terms in writing and have customer acceptance. The Penalty Interest Rates Act 1983 allows creditors to charge interest, but rates must be reasonable. Always include interest clauses in your formal trading terms.
Should I offer early payment discounts?
Early payment discounts (like 2% for payment within 7 days) can improve cash flow but reduce profit margins. They work best when your margin can absorb the discount, your own cash flow pressures are significant, or customer payment behaviour is currently very slow. Calculate whether the improved cash flow offsets the margin sacrifice. Often, strict terms enforcement works better than discounts.
How do I handle customers who always pay late?
First, ensure your invoicing and communication are flawless so late payment is not due to administrative issues. Then progressively escalate by reducing credit limits to match what they pay within terms, requiring partial prepayment for new orders, moving to cash-on-delivery terms, or ultimately ceasing supply if payment behaviour does not improve. Communicate clearly that continued credit depends on meeting payment terms.
What should I do if a customer disputes an invoice?
Separate disputed and undisputed amounts immediately. Request payment of any undisputed portion while resolving the dispute. This maintains cash flow while addressing legitimate concerns. Document the dispute and your resolution efforts. Set a clear timeline for resolution. If the dispute appears to be a delay tactic rather than genuine issue, consider formal demand processes.
When should I engage a debt collection agency?
Consider debt collectors when internal collection efforts have failed, typically after 60 to 90 days overdue, the debt value justifies collection costs (usually $2,000 minimum), and you have exhausted reasonable internal attempts to recover payment. Debt collectors typically charge 10% to 25% of collected amounts, or flat fees for specific services. Choose agencies that are members of industry bodies like ACDBA (Australian Collectors and Debt Buyers Association).
Can I use debt collectors for business disputes?
Debt collectors work best for undisputed debts where the customer simply is not paying. For genuine disputes about quality, delivery, or terms, legal advice or mediation may be more appropriate. Using debt collectors for disputed debts can damage relationships and may not be effective if the customer has legitimate grievances.
How do retention of title clauses work in Australia?
Retention of title clauses in your terms of trade state that ownership of goods remains with you until full payment is received. If the customer enters insolvency before paying, you may be able to reclaim your goods. To be effective, clauses must be in writing, accepted by the customer before supply, and clearly identify the goods. For maximum protection, register your security interest on the PPSR.
What happens if a customer enters administration owing me money?
Register as a creditor immediately with the appointed administrator. Provide proof of debt including invoices, delivery documentation, and account statements. Stop supplying immediately unless the administrator agrees to personal guarantee or payment on delivery. Expect to recover only a small percentage of what you are owed, typically 10 to 30 cents in the dollar for unsecured creditors. Secured creditors with PPSR registrations or retention of title receive priority.
How do I balance collections with customer relationships?
Professional, consistent collection processes actually improve relationships by setting clear expectations. Customers respect suppliers who are professional about payment terms. The key is consistency: apply the same processes to all customers, communicate clearly and respectfully, show flexibility for genuine hardship with structured arrangements, and act quickly on overdue accounts rather than letting resentment build. Poor payers who damage your cash flow are not valuable customers regardless of the relationship.
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