A business needs to maintain good cashflow – the functionality of your organisation relies on ready access to capital. A significant part of this is to avoid debtors. But, what steps can you take to prevent your capital being held by your debtors?
The Problem with debtors
All too often businesses find themselves hamstrung and unable to grow because their debtors are not paying their bills on time. If your money is tied up in debtors it can lead to a host of issues:
- Paying your own bills late because you’re waiting on yours to be paid; putting your credit at risk with your suppliers
- Stagnating: having no money to pursue growth opportunities and invest in marketing campaigns
- Inability to hire new employees or acquire assets
- Risking your future as a business
To avoid becoming a slave to your debtors, consider the following 5 solutions.
1. Review Your Credit Policy
Do you invoice your customers right after you provide your goods or services? What are the payment conditions on the invoice? How many times have you provided subsequent services for this client while they have outstanding invoices?
If the payment period is too long, consider reducing it. And if that client has procured your services several times without paying their invoices, you might need to implement tighter credit limits.
Reducing the time a client has to pay and limiting the services you offer without payment is vital. This will encourage debtors to pay fast so they can employ you again for their next job, or purchase more product from you.
It also protects you from the additional time and money you’ll lose if you continue to provide services that you may not be paid for. If you already have a cash flow issue, this is an investment you just can’t afford.
If a client is consistently in arrears you might have to refer to debt collection.
The payment terms need to be clear cut and adhered to by both parties.
2. Follow Up
Make sure you chase up unpaid invoices as soon as they’re late. Don’t leave it. It’s very easy for an invoice to go ignored if no one is actively chasing it.
Often, just a friendly reminder is enough. If the client needs to make payment arrangements, finding out sooner rather than later is the best option for your coffers.
Have in place a procedure for chasing up outstanding invoices and keep your clients informed. This might need to be more than just a reissuing of the invoice.
Ensure your accounting staff follow up with a phone call and take a note any relevant details. You’ll want to have well rounded records of your client’s payment history to refer to.
3. Credit Checks to avoid bad debtors
Do you conduct credit checks?
When taking on a new client, consider asking them fill out a credit application so you can run a credit check, especially if the work you’ll be doing will be significant cost-wise.
This is important for raising any historical red flags. It might not be in your best interests to take on a client with a background of unpaid debt, no matter how much you need the business.
Business is only business if it’s being paid for after all.
4. Late Fees
A tip for encouraging clients to pay on time is charging a late fee on overdue invoices.
On issue of the original invoice, clearly state that invoices that go past the due date will incur an additional charge. Then if the invoice still goes unpaid, issue an updated invoice.
Clients will rarely want to pay more for a service than originally quoted, so this is an incentive for them to pay on time.
5. Debtor Finance
Debtor Finance is a potential solution that can take the power away from your debtors and put it back in your hands.
Debtor finance is a unique strategic arrangement with your bank. This financing option gives you access to the working capital held by your debtors, and is more flexible than traditional secured facilities. It can help you pursue new business, purchase assets, take on staff and keep moving you forward towards your goals.
It is particularly useful for new businesses that need to keep expanding to remain competitive. Here are some of the ways you may choose to use debtor finance:
- Increase your sales by offering more appealing payment options and discounts to clients
- Meet greater demand by investing in more stock
- Buy equipment and hire more staff
- Pay your bills on time and protect your credit rating
- Keep your personal assets safe.
Have a chat with your finance broker to find out about debtor finance and how it might help you pursue growth opportunities for your business.