Minimising the lag time in your business between billing the customer and collecting payment is critical to liquidity.
Extensive lag time can cause significant problems, draining your funds, time, resources and personnel required for the daily running of operations. Everywhere in this cycle, you have to have working capital available to continue to operate, pay staff and draw a wage yourself.
While most customers are honest and will pay what is owed, some may have cash flow limitations because they are waiting on payment from their own clients. And unfortunately, some are just credit offenders and won’t pay. When bringing on new accounts, it’s essential to undertake thorough research and checks and have a credit policy that avoids these customers.
Especially in leaner times, debtor management should be at the top of your list for regular review. Keeping debtor days to an absolute minimum is crucial, particularly as clients start applying pressure to extend payment terms. The challenge is to keep on top of the situation and be aware on a daily basis what money is going in and coming out.
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When times are tough, you can’t afford to let money owed to you blow out to 60 or 90 days. There is no advantage to being the nice guy who is last to get paid and misses out altogether.
Think of yourself as a banker to your customers, lending them your money on credit. Although it’s not possible to prevent bad debt entirely, there are steps you can take to ensure your business isn’t badly affected by debt.
The successful collection of accounts receivable greatly depends on the quality of the credit your business is granted in the first place. This is dependent on having a professionally written credit policy in place. Ensure you’ve undertaken information-gathering about your customer before opening an account, and that all customers have the latest copy of your credit policy and understand your payment terms, credit note procedures, and how payment is to be made.
Your credit management system should enable you to easily identify who are your slow-paying clients and their credit-worthiness. The process should involve credit-checking potential customers and screening out the risky ones. It should have a dated record of all transactions and include customers’ reasons for late payment and when to expect payment.
If you don’t have an in-house accounts receivable capacity, determine how outsourcing debtor management services would fit into the bottom line. Weigh up the cost of the service balanced against the prospect of improved payment rates and the convenience of somebody else managing your debts.
Tips for chasing debts more efficiently:
Tips for motivating clients to pay:
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