Debtors are people or businesses who owe you money. Enforcing proper debtor management functions are critical in maintaining the healthy cash flow of your business. In essence, you are providing credit to your customers when waiting on payment after delivering services and rendering an invoice. This will increase sales but will reduce the cash flow critical to your business.
Managing debtors is often referred to as credit management, and includes:
- collecting debts on time
- setting credit limits and payment terms
- making credit applications and credit checks
- enforcing a clear credit policy
- chasing debtors
Collecting debts on time
Use a good filing system or accounting program to keep track of customers who owe you money. This will help you follow up overdue payments and control your cash flow.
You may consider offering discounts or other incentives if a payment is made before a certain date or impose penalties for late payments.
Always ensure that the collection process is professional, polite and firm.
Setting credit limits and payment terms
It is important that you communicate clearly to your customers on when and how you expect payment. This will not only improve cash flow, but also help maintain good customer relationships.
Standard payment terms include payment within 7, 14 or 30 days after the invoice date. Setting your customers’ terms shorter than your suppliers’ terms can help you avoid being out of pocket.
If you are in any way exposed to credit risk, rather consider other payment options or request the payment of a deposit before service delivery.
Making credit applications and credit checks
A credit check is one strategy you can use to manage the risk of bad debt. Before you offer a customer credit, have them complete and sign a credit application form or agreement. You can ask your legal or financial adviser for advice.
The final decision to offer credit should be based on all the data collected, in particular the references, years in operation (in the case of a business) and whether guarantees were signed in full.
Enforcing a clear credit policy
Your payment and credit policy should support your business goals. A clearly defined payment and credit policy helps promote understanding and reduce conflict with customers over payment and credit issues.
All staff should be trained to implement your policy. Document and publish it for all customers and staff to see. This is a good way to promote your business as transparent, fair and honest.
Being consistent when chasing debtors will help you to recover debts while maintaining good customer relationships.
Contact customers quickly about overdue invoices. If you offer payment terms of 30 days, begin following up debtors when payments are 7 days overdue.
Legal action is very expensive and should be considered a last resort.
We recommend the following steps when chasing an overdue payment:
- Send a statement requesting payment and indicating this is a reminder or final notice.
- Phone the customer and remind them to pay the debt. Ask them if there is a problem. If they offer no reason, ask them to settle the debt by a specific date.
- If there is a cash flow problem, try to arrange a payment plan that suit both you and the customer.
- If this problem with overdue payments is ongoing, review the customer’s credit terms, for instance to request payment before service delivery.
- If the debt is not settled within the agreed time, you may want to consider mediation, debtor finance or debt collection services.
If you are not able to recover the debt, consider writing off the bad debt in your tax return. Seek advice from your accountant or business advisor. Feel free to contact us should you need help with managing your debtors efficiently.