Do you have a lot of debtors over 90 days?
We recommend you work to minimize the debtors you have over 30 days, so that it becomes a very small percentage.
Why? …. not only is it better for your business to have the cash in for your service/sales as soon as possible, reducing your debtors also decreases your chance of having bad debts. Well managed debtors (your customers) will significantly reduce the amount of time and money incurred chasing outstanding payments.
How can you better manage your Debtors?
- Encourage your customers to pay upfront. To do this – offer EFTPos payments to your customers, so they can all pay using either their savings account, cheque account, credit cards (MasterCard and Visa are generally enough to offer), or debit cards.
- You may incur slightly increased bank charges to do this, however you will get your money in fast – which means no time and money will be incurred by you, or anyone else in your business, chasing outstanding payments.
- Offer early settlement discounts. If a customer is offered a 5-10% discount to settle their account within 7 days, they will be more inclined to pay early.
- Do not offer credit (eg. a 30 day account) unless your customer can supply three credit references as part of a credit application form (see us if you would like a proforma credit application form).
- If three good credit references cannot be provided, insist your customer pays upfront in cash/EFTpos for all goods and services provided by your business – until three good credit references can be provided.
- Stay firm with your payment arrangements, many good businesses have become insolvent because their customers became insolvent. You do not want chronic late payers and insolvent businesses as your customers – it will never be good for your business.
- Cut off or suspend the goods/services you provide to your customers as soon as they are late in paying you: do not keep providing them with goods/services if they are late. Once the full amount owing has been paid, you can resume goods/services.
- If it is a good customer who has always had an excellent track record (and who you know is solvent), you may wish to enter into a payment agreement, eg. offer progressive payments over an agreed timeframe.
- Provide statements to your customers, this shows a clear record of what is owing on the account, and when the various amounts outstanding are due.
Some businesses always expect that they will be able to pay late, it is almost part of their “business culture”. We have found that these businesses will only do this if you let them – from the start, employ the practices outlined above and they will know that they will have to pay your business on time.
How can you get your current Debtors under control and keep them there?
The best results for low debtors are always achieved when businesses have a dedicated person to call their customers requesting the payment of their outstanding bills.
- Bigger businesses employ an in-house dedicated Accounts Receivable person who not only issues all of the invoices for the business, but also sends the client statements out each month and then chases the accounts that are outstanding.
- Smaller businesses can do this themselves (eg someone in-house). Debtors then needs to be made a weekly task for that person, do not put it off week to week. When the debtors are done on a weekly basis, the process becomes quite quick and efficient. Alternatively, small businesses can outsource this role to dedicated collectors. Various collection agencies can be used for debt recovery – their approach can vary depending on how bad the debts are. Some will only charge you a percentage of the fees they collect.
Debtors can be a daunting task, we firmly believe that a polite and understanding approach should always be used when speaking to customers about outstanding debts.
Needless to say, it is always preferable to ensure that you create and implement an effective debtors procedure so that you do not have to spend time and money in chasing your debts.
Pat Mannix, Partner, Paris Financial
Follow me on Twitter @mannix_pat