A large part of keeping cash flow under control is managing your debtors. In these challenging times businesses will generally take as much time as possible to pay their accounts, after all, why pay interest on an overdraft facility when they can use your cash for free?
Good debtor management starts with a very simple calculation to measure ‘debtor days’. By dividing the month end balance of your debtors by your average daily trading, you get a simple measure that you can monitor on an on-going basis. If the number of days goes up, you know that people are taking longer to pay you, prompting to you to investigate why. If the number of days goes down, you know that you’re becoming more efficient at collecting your debtors.
As a simple example, let’s say a business is turning over $10,000 per day and has a month end debtors balance of $600,000. This would equate to having 60 days trading revenue tied up in receivables. If, over time, you could get this down to say 45 days, the business would have another $150,000 in the bank account rather than tied up in debtors.
So how do businesses get people to pay on time? Here are a few practical points that may help:
• Make payment expectations clear on all your invoices and Terms of
• In your Terms of Trade include a time frame within which any queries
relating to your invoice must be raised. It is always frustrating for a
query with your account to only be raised when payment is already
several months overdue!
• Reserve the right to charge interest on all overdue accounts and
specify the rate that will be charged. You should also advise that any
other costs incurred in the collection process will be passed on.
• Send invoices out promptly, preferably at the time of supplying the
goods or services or if invoicing monthly, very shortly after month end.
• Make it as easy to pay you as possible. Many businesses no longer
have chequebooks, so providing your bank details on invoices and
statements is essential. Allowing payment by credit card is also a valid
option, which can have great results, although take into account the
fees that you will incur.
• Make sure that you have a documented collections system and follow
it. A standard process will include a time line of follow-up letters, emails
and phone calls that ultimately lead to interest and collection costs
being added and the account being handed to a collections agency.
• Get tough! If you give someone a final date on which the account will
be handed to a collections agency, actually hand the debt over for
collection if it remains unpaid. Many businesses talk tough but will then
not actually follow through.
As with all things in business, a bit of common sense and compassion also goes a long way and while not ideal sometimes you may have to bend your own rules on collections when a good client or customer is struggling and needs a bit more time than usual to pay. As long as your customers are communicating with you, being honest and making the payments that they have committed to, then be prepared to cut them some slack occasionally to preserve good relationships. However, the moment those commitments are broken or communication stops, it’s time to move quickly to secure payment.