When things are flush, businesses can tend to take the laid back approach to setting and maintaining proper systems.

Whatever the economic climate, I take a pretty deep, deep breath-on-behalf-of when I come across any venture operating without the basics in place.

Take precautions. Practise safe business

Fail to draw up and use proper Terms of Trade and risk contracting a nasty case of "mismatched expectations” or, worse still, a rampant bout of "bad debtor disease”.

Terms of Trade are essentially the contractual arrangement between the customer and the supplier. This document generally covers what work product or service will be provided, in what timeframe (if applicable), and the expectations around costs and payment.

Don’t take someone else’s Terms of Trade, give them a quick tweak and call them your own. Firstly, we’re not talking one-size-fits-all here and, secondly, if you want this document to have teeth, it’s imperative it has the right clauses and that they’re worded properly.

For example, for those who supply goods, it’s vital you include a clause giving you ownership of the materials until they’ve been paid for. Fail to shore up your claim to your goods and you could find yourself playing unwitting philanthropist to an unworthy cause.

Quote v estimate

For many industries – especially trades – it’s not uncommon to provide either an indication of cost (an estimate) or a set price (a quote) at the outset.

Unless the work varies from that outlined in the original contract and a new price is negotiated, the quoted figure stands. Providing an estimate, though, does not give you carte blanche to charge whatever you like come invoicing time.

Estimates do have some flexibility - usually around 15 per cent. For example, if you estimated a job would cost $100, charge any more than $115 and the law’s likely to frown at you.

Getting your dues

There is often this staring-at-the-ground, flicking-dirt-with-the-toe-of-the-shoe kind of embarrassment around querying non-payment, which is, in reality, one of the most significant dangers Kiwi businesses face.

For starters, confronting tardy payers is much easier if you have clear-cut Terms of Trade spelling out exactly what the errant customer agreed to at the outset. Secondly, you must be doing mighty well if you don’t mind your business being used as a credit facility.

If payment’s overdue by about a week, a polite phone call’s in order. In many cases it’s an oversight, but ensure you have an agreed deadline for payment by the time you hang up.

Payment overdue by two weeks? This sorts out the "oversighters” from the "consciously-don’t-payers”. Reissue the invoice and make another phone call.

The squeaky wheel gets the grease.

I know a lot of businesses shy away from debt collection, fearing they’ll lose a great customer. I don’t tend to put recidivist bad payers in the "great customer” category. For customers who are genuinely struggling, the sooner you find out, the sooner you can put alternative payment options in place – which will likely come as a relief to both parties.

Hit ‘em where it hurts

Between one and two months’ overdue: Up the ante. Reissue the invoice – and this time whack on interest and deliver your bill in person. Note: you can only add interest if you’ve made provision for it in your Terms of Trade and it must be "reasonable” (commonly around credit card rates).

Between two and three months’ overdue: Start formal debt recovery proceedings. Make sure your terms include passing the cost of debt recovery to the customer, otherwise – guess what? You have to foot the bill for collecting your money.

Many a fine Kiwi business has gone bust – not because they didn’t have a great product, not because they didn’t provide top service, but simply because they didn’t get paid.

Feedback, comments and questions are always welcomed – please feel free to e-mail me on [email protected].

T: 03 443 0900

W: www.aspiringlaw.co.nz

Janice Hughes is a Director of, and senior legal adviser at, Aspiring Law. Please remember, this information is designed as a general guide, and should not replace specific legal advice on a particular issue.