Stay on top of your Debtor days for better cashflow

Posted on 01 Aug 2023

As a business owner, you should be familiar with your debtors’ ledger and the aged debtors’ reports. These are the nuts and bolts of good debtor management.

Regular monitoring of your debtors and effective debtor management strategies are nuts and bolts of your business practice. They flow through to overall cashflow and financial management. They complement your credit policies and flow through to your customer relationships. If you make your policies clear to your whole team and put systems in place so it’s easy for everyone to know what you expect from them, you’ll see the benefits.

Businesses that neglect these aspects expose themselves to risk at various levels:

• inconsistent treatment of customers, leading to confusion and damaged relationships
• inadequate cashflow, hampering normal operations and limiting growth
• poorly understood and poorly implemented financial controls, which in a worst-case scenario make businesses vulnerable to fraud

Familiarity with the nuts and bolts of debtor management are fundamental to good financial control systems.

If you can reduce your debtor days you’re going to have more cash in the business.

So, how can you reduce your debtor days?

1. Review your Terms of Trade. Payments should be made within 7 days of the customer receiving the invoice, not on the 20 th of the month following.
2. Have statements with only two columns. One for current and one for overdue. Columns showing 90 days and/or 120 days overdue let people think this is acceptable.
3. Ask for a deposit before you start work.
4. Invoice progressively so you can see you’re not getting paid early on.
5. Get on the phone early to your overdue debtors.
6. Use an outsourced debt collector, or at least a different member of your team to follow up payments.
7. Don’t keep working for non-payers.
8. Offer a discount for upfront payment.
9. Offer payment options - credit card, direct debit or automatic payment.

Need an easy way to work out your Debtor Days?

Use this easy formula: current debtors owing / annual sales * 365.

For example, if you have annual sales of $450,000 and debtors owing of $80,000, your debtor days are 65 ($80,000 / $450,000 * 365). If, in this example, your payment terms specify payment is expected within 14 days, then you have a real problem and your cash is locked up in your debtors much longer than it should be.

You want to aim to keep your debtor days between 14 to 30 days if possible. Anything over 45 is bad news.

Good debtor management supports healthy cash flow and that helps you drive the business further. The key ingredients? A good strategy, the right tools and having everyone in the team understand what’s needed and how important it is.

These four tips can help:

1. Stay on top of your debtors’ ledger. Review it often so you can act early with late payers. Know, on average, how long it takes for your debtors to pay you and set goals to keep that average as low as possible.
2. Make sure your terms of trade are geared to your business and communicate them clearly to customers. If possible, ask customers to sign agreement to your trading terms.
3. Have well-defined policies and procedures for credit, billing, and debtor follow-up.
4. Get your team together for some training so everyone – whether they’re sales, accounts receivable, finance or reception staff – are on board with your debtor management strategies, understand their own role and have well-rehearsed techniques for dealing with customers.

Our tips for better cashflow is also useful, even if you put one item in place today.

If you’d like to review your debtor management strategies and achieve a healthier cash flow, we can recommend approaches and tools that might give you better results. Get in touch with us today.

Xero have developed a cashflow hub that has resources and tips for businesses to help you get paid faster, plus there is a clear link between late payments and increased borrowing for small  businesses that is well worth a read.

Xero can also provide online payment options for your customers on your invoices and you can set up automatic reminders that are sent to your customers when their invoices are overdue.