Focus on getting paid faster
THE cost of having profit locked up in your business is quite significant.
Your debtors' book (what you are owed), while an asset of the business, cannot be used to buy equipment, reduce debt, or pay a dividend. So the focus must be on getting your customers to pay you faster.
The first thing you need is an efficient, structured system for approving credit and for following up overdue accounts.
Decide what your credit terms will be, whether you will offer early settlement discounts, will you charge account fees, what happens with late payments, who has authority to grant credit, what are your credit limits, who authorises credit suspensions and so on.
Once you have developed a system, and then make sure it has teeth… that means make sure that there are consequences if the system is not followed by your team.
You also need records of debtors that can be printed out in a report format.
Here are some tips to maximise your credit collection success:
Be vigilant in your follow-up. The slacker you are, the less serious your customer thinks you are.
Don't just send out statements each month. Telephoning and asking why the invoice hasn't been paid and when you can expect payment will have a more significant impact.
Keep a record of all contact you have with a debtor. That way you have notes to refer to in the future regarding promised payment dates.
If the customer is having financial difficulty paying all debts, perhaps you can negotiate terms.
When you receive payment, make sure you bank all cheques promptly.
Make it easy for customers to pay. Offer customers the facility to pay directly into your bank account. Set up BPay. Offer payment by credit card.
Be cautious before offering credit. Develop a credit approval system or process which must occur before offering an account to a new customer.
Develop key performance indicators for your credit department. Average debtor days are a common ratio.
This is how long on average it is taking to collect your debtors.
Remember the sooner customers pay, the more cash you will have on hand to pay your expenses and to invest further in your business. It makes sense then, to spend time developing systems and training your team.