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Following on from the last edition we continue to focus on cash flow, specifically collection

A large part of keeping cash flow under control is managing your debtors. In these challenging times businesses will generally take as much time as possible to pay their accounts, after all, why pay interest on an overdraft facility when they can use your cash for free?

 

Good debtor management starts with a very simple calculation to measure 'debtor days'.  By dividing the month end balance of your debtors by your average daily trading, you get a simple measure that you can monitor on an on-going basis.  If the number of days goes up, you know that people are taking longer to pay you, prompting to you to investigate why. If the number of days goes down, you know that you're becoming more efficient at collecting your debtors.

As a simple example, let's say a business is turning over $10,000 per day and has a month end debtors balance of $600,000.  This would equate to having 60 days trading revenue tied up in receivables. If, over time, you could get this down to say 45 days, the business would have another $150,000 in the bank account rather than tied up in debtors.

So how do businesses get people to pay on time? Here are a few practical points that may help:

  • Make payment expectations clear on all your invoices and Terms of Trade.

  • In your Terms of Trade include a time frame within which any queries relating to your invoice must be raised.  It is always frustrating for a query with your account to only be raised when payment is already several months overdue!
  • Reserve the right to charge interest on all overdue accounts and specify the rate that will be charged.  You should also advise that any other costs incurred in the collection process will be passed on.
  • Send invoices out promptly, preferably at the time of supplying the goods or services or if invoicing monthly, very shortly after month end.
  • Make it as easy to pay you as possible.  Many businesses no longer have chequebooks, so providing your bank details on invoices and statements is essential.  Allowing payment by credit card is also a valid option, which can have great results, although take into account the fees that you will incur.
  • Make sure that you have a documented collections system and follow it.  A standard process will include a time line of follow-up letters, emails and phone calls that ultimately lead to interest and collection costs being added and the account being handed to a collections agency.
  • Get tough!  If you give someone a final date on which the account will be handed to a collections agency, actually hand the debt over for collection if it remains unpaid.  Many businesses talk tough but will then not actually follow through.

As with all things in business, a bit of common sense and compassion also goes a long way and while not ideal sometimes you may have to bend your own rules on collections when a good client or customer is struggling and needs a bit more time than usual to pay.  As long as your customers are communicating with you, being honest and making the payments that they have committed to, then be prepared to cut them some slack occasionally to preserve good relationships.   However, the moment those commitments are broken or communication stops, it's time to move quickly to secure payment.



One advantage of Xero is that it has lots of add-ons for specific applications.

Below are some Xero add-ons that can help you keep on top of your debtors:

Debtor Daddy

Debtor Daddy

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Simple, set & forget credit control for small businesses. Stop wasting your valuable time and money chasing debtors, take control of your cash today.

XO Cashflow

XO Cashflow

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Streamlines the process of sending overdue invoice reminders to your debtors to help you receive payments faster.
This differs from Debtor Daddy in that you log in in and click "send messages" after you have reconciled your invoices whereas Debtor Daddy automatically sends them at a set time each day.

DebtForce

DebtForce

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Debt collection on-line at the click of a button from your Xero accounts. Overdue accounts recovered by your own professional recovery officer.

If you want more information about any of these add-ons please  This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

Disclaimer:  Accplus Offer this newsletter to help you think about issues that may affect your business. Please contact us if you would like specific advice or assistance.  As the information given is general in nature Accplus Ltd does not give any warrenties as to the applicibility to your situation or to the accurateness of the information given.

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