Managing debtors and cashflow for small business owners

Managing debtors (otherwise known as accounts receivable) is a requirement of doing business for most businesses, small and large.

A key aspect of well managed cashflow is keeping the gap between receiving money from customers and paying money to suppliers as narrow as possible. A  wide gap caused by waiting for money to come in from your customers (debtors) is a major cause of cashflow headaches for small business owners.

The key to finding a solution first lies in obtaining information about the way your customers pay you. A tool to do this is a simple metric called debtor days.

Debtor days is the average number of days it takes for your business to receive payments for its goods and services. Keeping track of this number is vital in understanding your cashflow gap and work on implementing solutions. So how can you use debtor days in your business?

 

How to calculate debtor days

 

Calculating debtor days is a simple calculation. The calculation is:

(Year end receivables amount / annual sales) x 365 days = average debtor days

For example, Business A has payment terms of 14 days, however they want to know what the actual average payment time is.

So: Trade debtors at 30 June is $40,000

Annual sales is $500,780

(40,000 ÷ 500,780) x 365 = 29.1 days

Using this information Business A now knows that its average debtor days is actually higher than what their payment terms allow for. This allows the business owner to first plan for the delayed cashflow, but then implement changes to improve it and then continue to use the debtor days calculation to measure improvements going forward.

 

What can you do to reduce the payment times?

 

1. Update your payment terms

 

Make sure your payment terms are clear on every invoice you issue. If you make a change to your payment terms, ensure that you let your customers know that the terms have changed not just assume they will notice the change on the invoice. Some customers will have your payment terms programmed into their accounting system, so its important that the change is communicated clearly.

 

2. Ensure your payment details are easily found

 

You should always include payment details on invoices and statements.   You may even provide details on payment options on your website and in your terms and conditions.

 

3. Issue invoices and statements regularly

 

Issue your invoices promptly and regularly. Use your accountign software functionality to issue auto reminders for unpaid invoices.

Send statements regularly so that your customers know what items remain outstanding.

Don’t use a one size fits all approach – you may need to have a different frequency/template/method depending on different classes of customers.

 

4. Send to the right person

 

Find out where the customer wants the invoice to be sent. Sending your invoices, statements and reminders to the wrong (or less than ideal) recipient is an easy way to have them overlooked or delayed. Often businesses will have an accounts email to receive all invoices which may be connected to an automated bill processing system like Receipt Bank.

If in doubt, call your customer and ask.

 

5. Use technology to your advantage

 

Take advantage of automated invoice reminders to remind customers when an invoice is due and when it is overdue. Sending notifications manually can be slow, time consuming, and cumbersome. Let the software handle it for you instead.

 

6. Make it easy for your customers

 

Clearly specify payment options and due dates. Having these details easy to find means less opportunity for your payment to be delayed.

 

7. Provide incentives for early payment

 

Incentives for early payments can boost the chances of early payments and also give you access to the cash earlier. For example, you can offer a small % discount for an early payment – this may work out in your favour if you are running an overdraft and paying a relatively high level of interest.

 

8. Offer several payment methods for clients

 

The more payment methods available to your customers the easier it will be for them to pay you. Add payment methods like credit card, direct debit, Apple Pay, Paypal, Afterpay and more.

 

9. Offer instalment payment plans

 

If you find that your customers struggle to pay off the invoice in one go you can offer an instalment payment plan.

 

10. Do not offer unlimited credit to customers

 

Make sure your terms and condition include the right to refuse further supply if invoices are outstanding. This can be important to encouraging your customers to pay their outstanding invoices.

 

11. Be a good customer yourself and talk to your suppliers

 

Maintain a good relationship and clear communications with your suppliers so that they can help you if you need an extension to pay your bills.

 

In summary

 

If you want to improve your cashflow the first step is to look at your debtors (accounts receivable).

Talk to us about strategies you can use to speed up the payments you receive from your customers and boost your cashflow. We can help you with implementing new technologies, adding payment options, updating software, and improving your systems and processes to get paid faster.