When times are tough it is amazing how quickly the cash supply dries up, I mean if everyone paid you then you could pay everyone else – right? Well hopefully.
Why is it that most businesses wait until challenging economic times to consider the introduction of a formulated debtor’s management system? Sadly many businesses are just putting the heat on their most trusted and longest serving customers to counter poor management practices in the area of collecting outstanding accounts.
Well times like these provide the opportunity to assess and introduce sweeping reform to our businesses – in particular the way we manage our customers that owe us money.
Did you know that the average debtor days for a small business is in excess of 55 days i.e. the time it takes from issuing the invoice to collecting the money. During this entire period you are acting as the bank for that customer but without charging any interest. To work out your Average Debtor Days simply take your total Debtors $ and multiply by 365 and then divide this total by the annual revenue of your business.
Debtor management processes that you can implement include;
- The use of credit application forms
- Regular review of your Accounts Receivable
- Staged discipline of Debtors collection routines
- Overdue Account Letter
- Cessation of Credit or Supply of Services
- Collections Phone Call
- Levying of Finance Charges
- Negotiated Settlement Agreements (Repayment plans)
- Debt Collectors or Legal Action
- Offering alternative payment methods
- Credit Card
- Upfront or Progress Payments
- Setup financial management systems that report average debtor days (by customer)
- Automated issuing of Statements and Overdue Notices detailing transactions that are out of usual trading terms
For example, for a business that has a turnover of $1 million, what if by putting in these processes you could improve the collection rate of your money by just 10 days? This has the potential to add an extra $28,000 of working capital into your business. Now that kind of money can be used to pay off loans, purchase capital equipment or simply invest in business efficiency systems that can further improve your cashflow. (Source: The 2009 Attaché Debtors Reduction Ready Reckoner Tool).
Now is the time to work on your business even more than ever and position it to take advantage of the opportunities that these times will ultimately present.