5 tips to manage your debtors (Accounts Receivable)
We all know how important cash flow is for the survival of our business, but do we take care of the basics to ensure cash is in our hands as quickly as possible after making a sale?
When we start to think about how cash flows through our business, it becomes clear there are 2 key areas where cash can get tied up;
– stock (or inventory)
– & debtors (or receivables).
For businesses it is extremely important it is to manage stock effectively for cash flow efficiency. Then it is then about developing our debtor management skills to get our cash back into our hands as quickly as possible to help to maintain and grow our business.
However, don’t despair! There are things small business owners can and should do to stay ahead of the pack. In this article you will learn 5 practical, “must-know” debtor control techniques to get cash back in your hands quicker, and beat the statistics.
1. Send the invoice the day a sale (work completed) is made – Don’t delay in sending out the invoice. Every day you delay sending an invoice is another day you are waiting for your cash.
2. Be more like the bank
Whenever you issue an invoice for payment, no matter what the terms are, you have effectively become a money lender. Think of all the things that a bank asks for when you apply for a loan; what is the loan for (purpose), have you got the capacity to repay the debt (payback), and importantly, are you of good character (person). These are known in the industry as the 3 p’s of credit.
Note;- As a small business owner, it is vital that you have a policy for when you provide credit, just as the bank does.
From your perspective the “purpose” is simply to purchase goods from you; the “payback” is simply collection of the invoiced amount; and the “person” is who you are providing credit to. By focusing on and investigating these ‘p’s’ you’ll be able to identify the people that you’ll be more comfortable taking the risk of extending credit to.
Set guidelines for the type of person you are prepared to give credit to. The sorts of things you should consider when setting your policy are:
• Do credit checks to ensure the creditor has a track record of prompt payment. This can be done using a credit rating company such as Veda, or by getting other trade references.
• Set payment terms, including a discount policy if applicable, and ensure they are clearly expressed on your invoices. Terms should be clear, concise and enforceable.
• Set a $ limit for how much you’re willing to extend for each customer. This will be based on what they need, the quality of references, and their track record.
3. Be proactive
Having a good relationship with your customer is, of course, important for every business. However, do you know all the people in their business, and are you talking to them regularly?
You might know the owner/manager, or the sales people, but when it comes to getting paid on time, the most important person in that business is the one who pays the bills. Simply put, make the accounts payable clerk and the payments authoriser your best friend.
Establish a proactive call program to your debtors. By calling in the week before their account is due you will have a better understanding of what you can expect to receive and who might be late, thus allowing you to plan your cash flow more effectively. If clients are unable to pay in time then this is a good opportunity to put a payment program into place again with the aim of maintaining a steady cash flow and strong relationships with your customers.
4. Make it easy for people to pay you.
In our technological world, there are a myriad of options for people in business when it comes to online transactional banking. The days of waiting for a cheque in the mail is fast becoming a distant memory. Take advantage of the options available to you, from direct debiting, to mobile options, have a talk to your bank manager and see what options you have. In short, make it easy for your customer to part with their money, so there are no excuses. Remember the quicker you get your money back, the more opportunity you have to use it to improve the business.
5. Have a late payment policy, and stick to it!
Have a well-documented and actionable plan in case a customer doesn’t pay on time. If a payment is 1 day late, don’t send a letter, call them. Be polite, after all we need our valuable customers, and it may have been paid that day. Just give a friendly reminder of the payment that is due, and perhaps offer to take the payment over the phone using credit card or direct deposit. It is important to have a policy, but the test is in whether you are prepared to take action. Handled well, this will show people you are well organised and professional and will enhance your relationship with a customer, not to mention improve your cash flow!
Write down what actions you will take with late payers, and then do it!
There are so many demands on a business owner’s time – from managing staff, to ensuring your stock is up to date, to keeping the bills paid and just about everything else that goes on day to day in a business. Sometimes its easy to let some important things slide. So remember these 5 tips for managing your debtors, to keep your cash flow strong and give you more time to manage all the other stuff.
1. Send the invoice the day a sale is made
2. Be more like the bank
3. Be proactive
4. Make it easy for people to pay you
5. Have a late payment policy, and stick to it!
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