TT315: Reduce debtor days to improve cash flow
Cash flow is king in any business. Yet cash flow is one of the areas that many businesses struggle to manage.
Customers are reluctant to part with their money, even if it’s to pay for your goods or services. As such, it can take a while for them to pay their invoices.
While longer debtor days might not be a big issue for huge international corporations, for the rest of us, it can be a very real source of stress. You need your customers to pay you as quickly as possible so you can continue to run your business, so it’s easy to find yourself working extra hours, chasing up late-paying clients. Here are a few tips to help you to reduce your debtor’s days.
Be clear and concise
When creating an invoice, think about your messaging. Is the due date easy to see on the page, does your invoice state exactly how much payment is required and have you clearly outlined the various payment options that you accept (such as bank transfers, cash, cheque, etc.)? Options such as “pay now”, “pay by installments” or “pay on the due date” should be clearly set out.
Sometimes offering a small discount can motivate your clients to pay on time. Offering say, 5% off the total bill for clients who pay within 2 weeks of the invoice date can help a business to get cash in quicker. Setting this type of incentive out at the beginning of a client relationship can go down well as clients can see the early payment discount as a “value add”.
Charge fees for late payment
Incentivise customers to pay you on time by charging a fee for late payments. If you communicate the terms and conditions around late fees clearly, clients will not be surprised if they are charged for late payment.
If you are going to charge clients for late payment, it is usually effective to give some sort of warning. It may be helpful to send clients an email saying that “payment is due in 10 days time and if it isn’t received, a late payment fee will be applied.” This gives the client an opportunity to respond.
There are a vast array of systems available to help businesses to track invoices, monitor payments and manage clients who have missed payment deadlines. With an automated accounts receivable system, you can keep track of the status of each invoice, who has paid and what is outstanding. You can set up automatic reminders at crucial moments in the payment cycle and significantly reduce your administration time.
By implementing the above strategies, you can reduce debtor days in your business and ensure that you are getting cash in as quickly as possible.
Talk to Barnes Roffe today