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How to manage debtors effectively

August 26, 2017

Most businesses fail as it is not able to generate enough operational cash to keep up with its day to day business cash commitments, even though the business seems profitable on paper. One of the prime reason for generating little operational cash is slow moving debtors.

 

Here are a few tips for managing debtors more effectively:

 

Credit Terms: Set up a credit term that is more appropriate for your business. If you are unsure look at the terms offered by your competitors or what is the standard practice within your industry. While it may be important to extend credit facility to your customers/clients, it will not be the single most decisive factor for them in selecting your product or service as they would still give more preference to the quality & price at which you are offering your product or service. 

 

Make your Clients/Customers aware: While getting new clients on board its very essential that they are made aware of your normal credit terms. You can inform them either during your initial meetings or at the time of sending out your first invoice. The credit terms must not only be conveyed verbally during your initial negotiations but they must form part of your agreements, Quotes and Invoices. The invoice layout must clearly say the credit terms. Ideally it should show up in large bold letters at the bottom of your invoice layout near the grand total figure.

 

Offer early payment discounts rather than charging late payment fee: It may seem reasonable to include late payment clause in your credit terms on the invoice layout, however it may not be the most effective. Lets face it, after  months of follow up your debtor has finally paid their bill you are just relaxed that you were able to recover the principal amount of the debt. What are the odds that you would chase them up again for late payment fee that would form an additional 5 or 10% of the debt. In contrast to this if you offer early payment discounts, you are offering an up-front incentive to your customers to pay your invoices on time.

 

Screening procedures: This step would mainly apply to new clients you are trying to get on board your business. Have some screening protocols like doing credit checks or get trade referrals for your new potential customers. If you are a start-up then you may not have the resources to implement this step. Most well established businesses also shy away from this step as they fear of loosing potential business. If you cant implement this step then at-least do some due diligence work on your clients background. Check if they are a well established business or start-up? If they are a start-up what is their funding position? It may even be worth to get an ASIC extract of the business.

 

Setting up credit limit within the system: Most accounting packages now allow you to set credit locks. This will disallow from creating any new invoices for a customer if they have an outstanding amount over a certain limit. However you will need to check your business process when the invoice is created. If the invoice is created after the work is done or goods have been dispatched then it would be too late by then. Also you will need to check the way the credit limit is handled within the system like some systems only look at the value and ignore the age of the debt. Like for instance if you set up a credit limit of $ 5,000 for a particular client then the system will disallow to create new invoice for that client even if all the invoices making up that $ 5,000 debt is within the credit terms. A quick fix for this would be to allow your sales team or invoicing department to have access to aged receivables report so they check the clients balance & age of the debt before doing any new work or accepting any new orders for a client.

 

Structured Collection Process: Like doing credit checks or getting trade referrals, most business also avoid having a structured collection process in place as they are either more focused on delivering their goods or services to their clients or they don't have the time or they don't want to create stressful environment for the clients and fear that they might loose business. This sometimes also happen as the in-house bookkeepers or accounts receivable function don't have much authority on the amount of pressure they can put on the client to recover the debts. Irrespective of the reason having a structured collection process will send a message to your clients that may push them to give priority to your invoices in their pay runs.

 

Sending monthly statements/Follow-up emails: Most accounting packages now have the capacity to email monthly statements to your clients. Sending out monthly statements to clients gives them an opportunity to do a quick reconciliation of your accounts and to ask for copies of invoices if they were missed out. However you need to make sure that they are being forwarded to the correct email addresses. If your clients are a larger corporation then chances are more likely that they will have a dedicated accounts payable department that maybe separate to the people or the department you deal with on regular basis. Some larger corporations may also have internal processes, like their PO numbers must be quoted on your invoice/statement to be able to be processed by their accounts payable department. So make sure you have enough knowledge about their systems to ensure your invoices are not caught up in their internal processes. It is also worth noting that sometimes the statement email sent out by the email program of your accounting package may get caught up in your clients spam filters. Even after making all these checks if there is still no movement in a particular debtors account then you may want to or get your bookkeeper to start sending personalised reminders/follow-up emails to particular clients.

 

Resolving invoice related issues: If you are aware that an issue was raised be your client after they received the invoice or monthly statements or special reminders try to address it quickly and make sure your bookkeeper or the accounts receivable department is made aware about the adjustments if any to ensure they are chasing up the correct amount. Often when these issues are not resolved on time your clients may stop responding to monthly statement or follow-up emails sent by your bookkeepers and the older the debt gets the harder it gets to collect.

 

Online Merchant Facility: Having set up an online merchant facility will give you the option of collecting payments from clients credit cards. You would generally include a section on your invoice layout or monthly statement for accepting credit card information. When accepting payments via credit cards just don't confirm the credit card details from your clients over the phone, unless you have a facility of recording incoming phone calls as most well established businesses have. Try to get your clients to fill out and sign the credit card sections on your invoices or monthly statements as this will act as a paper trail in case a transaction is disputed after the payment is charged to your clients credit card. It would be worth checking with your merchant service provider what other things you need to be aware about when accepting clients payment using their credit cards.

 

Offering payment plan: If your client is not able to meet their obligations as they are in a financial crunch offering a payment plan would be your best option to ease some pressure off them and at the same time you would be able to bring some momentum in their account. However the payment plan must be tied by dates and amounts. Also getting your clients to acknowledge payment plans in an email would be advisable as you or your bookkeeper, depending on who is chasing up the debt, will be able to use that as a reference. While your client is under a payment plan, closely monitor about the new work/orders being carried out for the client.

 

While it is essential to keep debtors under control try not to focus too much on the absolute balance of your accounts receivable ledger, but pay close attention to the age of the debtors and the regular slow payers. Watch out for indicative factors that are local to your business or industry like when your business is experiencing a decline in turnover then it could be possible that your clients businesses may be experiencing the same and soon they may find it difficult to keep up with your invoices.

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