Customers that stretch out how long it takes to settle their bills are costing you more than time and frustration. However, increased electronic connectivity between small businesses, accountants, and financial institutions coupled with cloud accounting and traditional methods can help your debtor management.
As with any relationship, timely communication between creditors (suppliers) and debtors (customers) goes a long way to avoiding trouble. To help achieve this, one of the tools for small businesses is the “financial web”, which describes the electronic connectivity between small businesses, accountants, and financial institutions, particularly when coupled with cloud computing. The continued expansion of the financial web helps SMEs make smarter decisions, improve cashflow, get paid faster, and access capital quickly.
What are the best ways to manage debtors effectively?
Try to avoid the problem before it occurs. For starters, if you don’t have large cash reserves, you may want to reduce your payment terms to 10 days or even seven days.
Also, consider the following:
1. Be upfront about “how we do it here”.
2. Quantify fees in writing in advance.
3. Invoice regularly.
4. Invoice quickly – as near as possible to the conclusion of work segments.
5. Where practical, present the account to the customer.
6. Provide payment options.
7. Consider fixed fees.
8. Follow up debts systematically and often.
9. Explain in detail the true value of the work.
10. Build a relationship and demonstrate your value.
In the case of debt collection costs, the Fair Trading Act (FTA) requires you to disclose your terms of trade to customers at the time credit is given. These terms and conditions must include a provision for the recovery of collection fees. For total transparency, you should ensure your terms of trade are clearly available on your website, invoices, and statements.
The right way to collect a debt
Before you pursue a debt, you want to be sure you supplied the right goods and services, in the right quantities, to the agreed standard, for the agreed price and within the agreed timeframe.
In collecting a debt, be firm but polite and respectful. Never apply force or pressure. You may not harass or hassle anyone. You cannot mislead or deceive the debtor. You should never pass on false or private information. Nor can you charge unreasonable debt collection fees. Do not tell a debtor that they will be fined or face legal and court costs on top of the original debt, as this is a breach of the FTA.
Pathfinder Solutions recommends that you contact your slow payers and chat with them – ideally in-person – about how they’re finding your company’s service. This gentle reminder of your working relationship and the value you provide can result in payment on the spot or soon after.
The mutual benefits of payment options
You’re a business owner; you appreciate only too well how much every one of your business debtors has going on at any given moment. You also know that some of your debtors may be struggling and thinking their only choices are to pay or not to pay. So, can you give them more options? What about putting an instalment plan in place? Or, maybe you could offer an incentive for prompt payment?
Above all, keep working with your debtors to keep that vital cashflow moving.
If you’d like some more practical advice about how to improve cashflow overall, the Pathfinder Solutions team would love to help.
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.
