How to keep on top of your business’ debtors
Straightforward credit management options to ensure a healthy cashflow
Credit management comes in many forms and there are various tips and tricks for keeping on top of customers you give credit to.
Aged Debtors list
The first step which all credit giving companies should do is to create an Aged Debtors list. This contains information on who pays when, who is late to pay and who consistently pays on time. You can create a basic Aged Debtors list using a simple spreadsheet. You need:
- The customer details: a/c number, name
- The invoice details: number, date and due date
- How old the debt is: 120 days, 90 days, 60 days, 30 days or current
- The total amount owed.
Traffic light system
This list can be made clearer through the implementation of a traffic light system. By using green for ‘pays on time’, amber for ‘sometimes late’ and red for ‘often late’ you help yourself identify the customers and clients worth keeping and those that are worth questioning. The traffic light system can also be used to highlight those customers who can handle longer credit terms. A green lighted company asking for increased credit terms should be given priority for longer credit over red and amber lighted companies.
Send regular reminders
Often with businesses, and also customers, you won’t receive payment until a statement (or two) is sent to remind the business to pay. By regularly reminding customers that they need to pay you, you are also keeping in contact with them, building on the relationship.
Cost and benefit analysis
Rewarding customers for early payment is another method to receive payments sooner. A cost and benefit analysis would need to be done but sometimes profit needs to suffer in order to keep your cashflow looking healthy. So, for example, you may want to offer a 10% discount to those who pay within 15 days instead of the 60 days you have agreed. Here, you will be saving 45 days’ worth of overdraft interest and also allowing yourself to reinvest the cash in your business earlier. However, you will, of course,be losing 10% revenue – a compromise that may be worth making. Depending on your overdraft interest rate and the value the advanced cash from early payment is to your business, this could be a suitable option for you.
Bad debt insurance
The final method of credit management is to take out bad debt insurance. Obviously, this incurs a monthly fee, which, as a rough guide, could be anything between 0.1 and 0.6% of your turnover depending on the risk of the customers to the business. This may not be a feasible expense when you are just starting up but, if you can afford it, it could save you money in the long-term. You want to be able to trust that everyone you do business with can pay on time, but realistically you can’t give credit terms to those that are unlikely to be reliable. With careful selections of who you do business with and effective management of an Aged Debtors list, you can help to ensure your debtors always pay on time.
Alex Kyriacou is brokerage manager at invoice finance specialist Touch Financial.