Managing debtors efficiently is critical for businesses to maintain a steady cash flow and sustain operations.
Poor management of debtors can lead to cash flow issues, which could affect a company’s ability to meet its obligations, grow, and invest in the future. Here are some strategies to help businesses manage debtors more effectively.
1. Establish clear credit policies
Before extending credit to customers, it is essential to establish clear and consistent credit policies. These should include credit limits, payment terms, and the criteria for granting credit. Communicating these terms clearly to customers from the outset ensures that both parties understand their obligations. Common payment terms include 30, 60, or 90 days, but businesses should tailor these terms to suit their cash flow needs and industry standards.
2. Conduct credit checks
When onboarding new customers, conducting a thorough credit check can help minimise the risk of bad debts. Companies like Centrix or Equifax offer credit reporting services that provide insights into a customer’s creditworthiness. By knowing a customer’s payment history and financial stability, businesses can make informed decisions about whether to extend credit and set appropriate limits.
3. Implement efficient invoicing systems
An efficient invoicing system ensures that invoices are issued promptly and accurately. Businesses should adopt cloud-based accounting software to streamline the process and send automated payment reminders. Offering multiple payment methods, such as direct debit or online payment options, also makes it easier for customers to settle their accounts promptly.
4. Regular debtor follow-up
Maintaining regular communication with debtors is essential. By following up on overdue payments promptly, businesses can avoid letting debts accumulate. Phone calls, emails, or formal letters can serve as effective reminders. Setting up automated reminder systems helps keep the follow-up process efficient and timely.
5. Debt recovery measures
Despite proactive management, some debts may still become overdue. In such cases, businesses should have a clear escalation process. This could include offering payment plans, engaging with debt collection agencies, or taking legal action if necessary. Businesses can apply for a statutory demand or take the matter to the Disputes Tribunal for resolution if required.
6. Monitor debtors regularly
Regularly monitoring the debtor ledger helps identify potential issues early. Businesses should analyse aged debtor reports to assess which customers are consistently late in payments. This can help prioritise follow-ups and decide whether to review a customer’s credit terms.
Unpaid invoices can create significant financial stress, but with the right strategies, businesses can minimise the risk of bad debts and stay on top of their accounts receivable.
If you need help understanding how to manage your debtors or the tools available to streamline your processes, talk to us!
About Pathfinder Solutions
Pathfinder Solutions advisory team members have either owned or managed businesses, or are investors themselves, so we know first-hand the challenges you face in your world.
Sure we’re Accountants, but the best solutions in business come from focusing on more than just the numbers. Our real-world business experience delivers just that.
