7 ways to Manage Debtors more effectively
Are you struggling to manage debtors? Don't worry we have you covered. Learn these essential processes and you will boost your cash flow and improve on your business success.
Managing debtors is a stressful process. The success of a business is heavily dependent on cash flow and being able to convert products and services to cash. This is why it is crucial to have the right processes in place to manage your debtors and their payments.
If you are unsure of how to manage your debtors or where to start, read our 7 tips on how to effectively manage debtors and the resultant success of your business.
1) Payment terms must be clear from the beginning
To be paid quickly you need to make it easy for debtors to pay you. Your quotes and contracts should be clear and state your payment terms. Invoices should contain the full payment details, this way it is easier for them to pay.
Here are some details your invoices should contain:
• Amount owed and the due date
• Billing address and bank account details
• The payment methods available, offering credit card and online payments are the most common
• Details on early payment discounts or interest on late payments
TIP: Cash is king, if you can rather work on a cash upfront basis
2) Send invoices and reminders immediately
Make sure you maintain a flow in your debtors function. Always send invoices as soon as you have completed your product or handed over the product to the client.
Make sure you have a system to follow up on invoices, this can be automated with accounting software like Xero now offering this function. You can set the intervals for reminders on your accounting software thereby following up regulary.
It's always better rather reminding a client than allowing the situation to deteriorate to the point of bad debt or a letter of demand.
Remember your customers do have lives and this might mean they might just miss your communication as they too could be busy. Therefore, make sure you follow up more than once in case you just missed them the first time.
3) Keep all your systems up to date
The cornerstone of debtors management is the information and how it is stored and maintained. Accounting software packages like Xero come with a multitude of benefits and potential software integrations to help you maintain the information on debtors.
Accounting software can reduce a lot of the manual work and help maintain information on cloud based platforms also allowing you to manage the access of your team.
To manage debtors you need to keep your eye on the days outstanding. The days outstanding indicate where the bad payment trends are and who should be followed up with.
Managing debtors is crucial for your cash flow and cash flow is crucial for the survival of your business.
4) Create your own receivable process and proactively select struggling customers
Always keep an eye on the financial health of your customers. This will give you red flags early on.
You need to ensure your customer acknowledges their debt. Then you can come to an arrangement to settle the account and not destroy the relationship. If they still don't pay then it is advised to discontinue providing services until the account is up to date (make sure this is stipulated in your agreement with them).
Once a debtor has paid their debt then agree on new terms with them so that the relationship remains healthy. Debt collection is the final resort and all other avenues should be exhausted first before this step is taken.
5) Late Payment Conditions
Never offer credit to a client on which you haven't done a credit check. No financial instution provides credit without these checks.
In the event that you have late payments you might want to consider the terms and interest chargeable in these situations (in the event that you become a "credit provider" and charge interest then it will result in potential requirement to register with the National Credit Regulator (NCR). It is best that this is also disclosed up front with your customer.
Always stick to your terms and if there is any relaxation awarded to a client on any terms then stipulate that it is once off in order to foster a good relationship.
6) Stay top of their mind
Make sure your clients remember you by touching base regularly. Ensure you are the one they will pay first when payments are scheduled. Show your customer that you are persistent and follow up repeatedly. They will get to learn the boundaries and this will in time change behaviours so that late payment isn't repeated.
If you want to succeed as a business then you have to manage debtors effectively. Manage your debtors correctly and other facets of your business and you can grow.
7) Bad Debt Provisioning and Collection
Bad Debt has several areas that require attention here are some of the crucial aspects:
- Trade terms need to be checked by a professional to ensure they are legal and assist the company when there are payment impediments and how to collect on those.
- Credit Insurance products provider cover for business owners, you would need to assess your level of risk appetite and cover required.
- Send letters of demand as soon as they are appropriate for the situation and be prepared to go to court should it escalate.
- Debt Recovery services should either be provided in house or outsourced. It is important to take note of processes required as per legislation for example National Credit Act.
- Make provision for bad debt in your budgets.
- Make sure you act swiftly with collections.
Bad debts can escalate to a serious problem impacting the cash flow of a business. If a business struggles with cashflow they will struggle to maintain their overheads as and when due. If they opt for credit, then it comes with finance charges and to obtain credit they need a good trading history. Cash flow if not managed properly can cause the entity to face the eventuality of being "cash-strangled", and no cash means doors close.
TOP TIPS:
- In the event you need one - Find a debt collection agency and make sure you read their terms of collection and whether you pay up front or not. Also take note of their charges ie. their cut for successful collection. If you going to handle it internally then ensure you set up your system. Law dictates the method in which you can collect and how that process must be handled from a legal perspective for it to stand up in a court of law.
- Make sure you do credit checks up front so that you know your customer.
- Choose the right accounting system, we promote Xero.
- Make sure you maintain proper records.
- Always remind your client - Let's save the relationship by resolving these issues, so that you can have a long, prosperous and healthy working relationship.
- Keep your eye on credit management as working capital is the lifeblood of your business.
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