Most businesses have formal accounts receivable policies that dictate when to bill, how much to bill and when to collect. Sometimes it can be hard to enforce these policies effectively, due to a lack of time or expertise. This means that your customers receive a great financing deal from you while your cash flow suffers.
When your debtors aren’t being managed effectively, you are said to have a poorly performing debtor book. This is bad news for your cashflow and the overall health of your business. So how do you know whether your debtors are performing well?
Ask yourself the following questions about your debtors to see how yours are performing and whether you can make any improvements to your cashflow and the health of your business.
What are your payment terms and do your customers follow them?
Are your payment terms easy to find and understand? Getting paid will be easiest if everyone knows the terms from the start. Make sure that:
- Quotes and contracts address your payment terms.
- You set your terms out clearly on your invoices.
Sometimes you may be best to openly discuss your terms with a potential customer.
Are your payment terms fair in your industry?
You may not need to wait 30 or 60 days for payment. Depending on your industry, you may be able to set shorter payment periods or terms that allow you to collect your cash more quickly:
- Can you shorten payment terms to 7 or 14 days?
- Require cash-on-delivery.
- Offer a discount for early payment, or charge interest for late payment.
- Ask for a deposit or part-payment at the time an order is made or a job starts.
- Ask for progressive payments over the course of a longer job.
All of these options can improve the performance of your debtors.
What are your administration practices like and are they effective?
You can’t get paid if the invoice doesn’t get to the right person with the right information, so make sure you have:
- The right email addresses – an invoice can’t be paid if it’s never received.
- The right person – the person who pays the bills.
- The right information that your customers need to make processing your payment easy. That might include job numbers, customer reference numbers, quote numbers, custom descriptions, cost breakdowns or unit prices.
- The right invoicing software that allows you to send invoices easily and promptly.
Are you sending invoices and reminders in a timely way?
Make sure you’re sending invoices promptly after you have finished the work or the customer has the goods. It’s also important to follow up on invoices that are overdue.
Regular reminders are more effective than final demands, and make sure they’re friendly but firm. Have a system for regular follow-up with late payments.
Don’t be afraid to pick up the phone to follow up late payments – it may be the impetus your customer needs to pay you.
A healthy invoicing and follow-up system will improve the health of your debtor book.
How do you decide whether to offer credit to a customer?
Do you have standard terms to offer to everyone – or do you tailor the process? One thing is certain: you need clear and concise policies for issuing credit and recovering debt in a timely fashion.
Solicit input from the sales team when setting policies to ensure market realities are reflected. For instance, you need to understand when to grant credit, to whom and in what circumstances credit should be withheld. It can be tough to acknowledge as a business that not all customers are good customers.
How do you determine what credit limits are acceptable? For example, if a new customer is interested in purchasing large volumes on a regular basis, you may need a more stringent process, such as full background and credit history checks.
It’s also important to regularly review your credit approval process. As customers and industries change, risk profiles change as well. An industry might be going through a downturn, or another industry might be high-growth and volatile – you may want to alter their credit terms as circumstances change.
Do you know what metrics you should be looking at?
By adding working capital metrics to your standard revenue and profit tracking reports, you’ll get a clear picture on items like:
- days sales outstanding (DSO)
- the percentage of customers who pay late
- the number of invoices or customers passed through your system
- unreconciled items or accounts
- the monthly percentage of write-offs collection rates on bad receivables
- collection efforts made
Gathering and understanding this data means that you can take steps to improve the health of your debtors. If you are unsure how to do this yourself, it might be worth employing an accounts receivable expert or outsourcing to a specialist.
Can your debtors pay you easily?
If you make paying you difficult, you can expect to receive late payments. Instead, offer a variety of payment options suitable to you customer base, including cash, cards, direct deposit, BPay, payment plan, online, and in person.
Whatever options you make available, make sure those options are clearly stated on your invoice.
If you’re not already, make use of online software such as Xero, which allow your customers to simply click a payment link on their invoice and make direct, secure payment online.
What tools are you using to manage your debtors effectively?
The right tools can make managing receivables much easier.
Choose software that automates much of the process (turning quotes into jobs and jobs into invoices, sending automated reminders, syncing with customer details) but allows you to tailor the details for a personal approach.
Make sure your software lets you see information like overdue invoices and who owes you money, at a glance. It should be easy to keep track of what’s paid and what’s not.
Your customer details should be only a click away from the invoice information so it’s no effort to re-email or phone the late payer.
It’s worth thinking about centralizing accounts receivable processing, and either employing experts or outsourcing to experts which develops and enforces common practices and standards.
Similarly, by automating processes, you can eliminate manual data entry errors and reduce transaction times. Standardizing processes will help to ensure that the invoicing, accruing and collection/deduction of rebates is performed on a timely basis to maximize cash flow and minimize risk. Failure to implement strong processes can result in lost revenue and increased write-offs.
How do you manage your payments when they come in?
What system do you have in place when payments arrive? As payments come in, it’s essential they be applied both to the right customers and to the specific customer invoices they relate to. This needs to be done on a timely basis so you always know which accounts are up-to-date and which are outstanding. Otherwise, it’s impossible to track which customers paid on which invoices – making follow-up on late payments a virtual nightmare. Businesses that get this wrong often waste considerable time and resources reissuing invoices and chasing up late payments.
Ways to improve your payment system include:
- Allocate payments to specific invoices rather than simply crediting the customer account
- Apply payments to the appropriate invoices, not just the oldest invoices
- Apply payments to each account on the day they’re received, to maintain system accuracy.
What do you do when you’ve got late invoices?
If a bad debt persists you need to make sure you deal with it legally, ethically and calmly. You may enjoy collecting revenue, but it’s not uncommon to hate collecting receivables in a timely way. This is often due to weak processes or not having a credit collection policy in place. Failure to adhere to the company’s credit or collection policies makes it harder to determine which payments are late and which will never arrive.
Ways to maximize collection of receivables include:
- Engaging in frequent and consistent collection efforts. This includes bolstering staff skills if they lack knowledge on how to collect amounts owing from recalcitrant customers
- Negotiating payment plans that align to corporate collection policies
- Ensuring any discounts offered benefit the company and are implemented accurately
- Strengthening processes to permit accurate reporting
- Automating processes to avoid manual entry errors
If you’re not sure how to implement an effective credit collection policy, it may be worth outsourcing to a specialist. This may have a significant impact on your cashflow for the positive.
How well does your debtor book perform? Find out more about how your debtor book is performing using our free and simple tool Click Here.
If you’d like more help with your debtors and managing cash flow, make sure you download our free eBook. More than 30% of companies in Australia fail because of cash flow issues. Is your business at risk of falling into that category? Find out more by downloading 12 Proven Strategies to Get Clients to Pay Their Bills on Time.