Founder of CAD Partners CFO On Call accounting franchises discusses terms of trade

Sue Hirst, founder of CAD Partners CFO On Call accounting franchises explains the importance for businesses to prepare clear and concise terms of trade, in order to minimise the risk of clients and customers defaulting on payments due.

A recent report noted that 80,000 Australian firms had their risk profile downgraded in the first quarter of 2010. For those running small to medium businesses, this means that some clients or customers could be on this list, and hence problems regarding payments can arise if these firms get into financial difficulty.

When a firm gets into financial difficulty they look for loopholes and reasons to justify delaying payment, or not paying at all.

The founder of the accounting franchises states that one of the best ways for a business to protect themselves and to ensure that they get paid is to have well prepared, clear and concise terms of trade in place.

Verbal and ‘hand shake’ agreements may be appropriate in certain circumstances, Sue explains, but it is important to have something solid in writing to refer to when things do not go to plan.

In addition, she notes, it is important that when an agreement is entered in to, both parties sign the terms of trade to eliminate potential conflicts that can arise from conflicting terms on either side of a transaction.

Similarly, the accounting franchises founder notes, when it comes to licensing and distribution agreements, care should be taken to ensure that there is a clear understanding between the parties as to what the intellectual property component really means.

Acknowledgement of copyright and other IP in terms of trade is critical.

When considering terms of trade, Sue says, it is also wise to consider the Sale of Goods Act. For instance, the provisions of the Act do not currently apply to digital products, so sales of software and other digital media should be carefully scrutinised.

Another very important issue is the question of personal guarantees, the founder of the accounting franchises notes. In a recent case, a company delivered industrial design services and did not get paid by the purchasing company.

A magistrate held that, because a director of the purchaser used the word “I” in a letter (rather than “the company”), there was an implied personal guarantee, and awarded judgement against the Director.

While this ruling would likely have been overturned on appeal in the Supreme Court, it was cheaper for the director to pay the bill rather than to incur the costs of an appeal.

The important point in this case was that the terms of trade did not exclude the guarantees of the director.

There are many other items that should be considered when formulating terms of trade. Ultimately, significant costs in time and money might be saved by ensuring that clear and concise terms of trade are in place from the beginning of a transaction.

Financial consultants at CAD Partners CFO On Call accounting franchises are experienced in all aspects of financial control and CFO value-adding services for small to medium businesses, and are available to further discuss and develop unambiguous terms of trade.