Top 10 Tips to Manage Debtors

David Edmunds, SiDCOR’s Financial Analyst

There are few more important functions in any business than cash collection. When this is stressed, that stress invariably is felt throughout the entire business, especially when the cash stops coming in…

Maintaining a healthy accounts receivable function is something that requires constant attention. Too often it is neglected and when the business can least afford it. Busy periods are one such example. Heavy demands can lead to slow invoicing and follow up, at the same time larger than normal supplier invoices are piling up.

Before we get to our ten tips for debtor management it is worth reflecting on the following:

OUR TOP 10 TIPS

1. Systemisation will give you the greatest return on investment – Looking inhouse should be your first stop, and resolving whether your current debtor system is both robust and being adhered to. Whilst maintaining this will always require effort, with the right accountability structures in place there should be a considerable reduction in unnecessary volatility of debtor levels and require less effort than only focusing on when the issue gets out of hand.
2. Cut your invoicing delays – Are you billing quick enough & often enough? The time taken to bill for work can make up a significant part of the lag between job completion and cash collection. Also consider whether there should be a WIP or sales threshold above which some form of up front or interim payment is required to prevent you from carrying the full load of costs until after the job has been completed.
3. Segmented terms – It is very reasonable to offer different credit terms to different types of sales or customers. You may want to consider only offering accounts for sales over a certain threshold (say $1,000) or not on business to consumer sales.
4. Credit assessment – Requesting the necessary information from customers to confirm their credit worthiness is a process that is often overlooked by small businesses. This will not only reduce the risk of bad debts, but also help you make a judgement as to whether the business has the capacity to meet your payment terms.
5. Alternative options – Upfront payments, subscription models, retainers, instalments, direct debits… There are plenty of alternative billing options out there that have proven to be successful, and you need a model that aligns with your cost structures. Have a look at the approaches industry leaders or disrupters are taking and consider if they could be implemented in your business.
6. Discounting – Early payment discounts have long been around but not seen so much in recent times. It might not be something you always offer or offer to all clients, but offering a small discount for early payment (i.e. 2% if paid within 10 days of invoicing) can have benefits that exceed the lost revenue. On top of that you might want to consider a “one-time-offer” of a discount on payment of older invoices if it can help get your debtors portfolio back in shape.
7. Do we need to see other people? – Some customers are harder to service than others. It is worth asking whether there are any that have become uneconomical to service through reasons such as the difficulty and delays in obtaining payments. If there’s no scope to raise your pricing to sufficiently recover these costs, consider wishing them well and going your separate ways. When considering the cost of the lost revenue, don’t forget to account for the opportunities you will now have with the added time and energy not committed to any struggling relationships.
8. Technology & credit – There has never been more credit available to both consumers and businesses. Why not try to push some of your customers to use those options more and not your own credit? Almost every adult has one, if not multiple credit cards. Add to that the increasing availability and cost reduction of mobile payment devices and accounting / invoicing systems that now allow operations staff to take onsite payments at the completion of a job.
9. Team effort – it is really important both your operations and sales function understand and support any changes in your debtors function. A business wide understanding of what you are trying to achieve will lead to a more successful implementation whilst maintaining positive customer relationships. This will include sales understanding customer payment patterns (and pricing accordingly) and operations knowing and respecting any stop work criteria where credit thresholds are breached.
10. Nudging – The research is conclusive that nudging customers to encourage the behaviour you wish to see from them is effective. Consider whether some additional communication would improve your debtor situation. If your customers better understood the impact their delays had on you and your business, and the quick payment prevents resources being tied up in accounts, keeping prices & response times down, perhaps payment times would improve?

Finally, if you are concerned with how these changes might be received, trial them on select clients. Why not try reducing your payment term from 30 days from invoicing to 14 days on the next 10 new clients and see what the reaction is.

If you are considering implementing any of these changes it is vital you consider how this should be communicated. If you see that these changes could have a particular impact for select clients, be proactive and communicate the planned changes well ahead of implementing to allow them time to plan how to manage the change.

If your business is providing great service and continuing to find new ways to provide valuable products and services, smart changes to your debtor policy are unlikely to have costs that exceed the cash flow benefits for your business.

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