Thanks to COVID-19, Australia is in a recession, and we’ve got to all work hard to keep afloat. Have you resolved to improve the cash flow in your business, from managing your accounts receivable, to ensuring you claim any tax cuts and benefits?
One of the main areas where cash can be tied up in your business is in your Debtor’s Ledger.
Accounts Receivable or Debtors are the amounts that you have invoiced your customers however they haven’t paid yet. Often this is one of the largest assets in your business and yet, your biggest need for working capital. After all you have to pay wages every week or two. You have your own bills to pay so waiting for your customers to pay you can put severe pressure on a business.
Best Practice for debtor management includes ensuring that you get the preliminaries right before even making the sale.
Set your price
Establish the cost of your product/service up front so there are no surprises or excuses. Give quotes & estimates where needed.
Establish your Terms of Trade
Terms of trade help establish your legal relationship with your customer. Before selling to them you should provide them with a copy of your terms of trade. A lawyer can help you establish appropriate terms of trade for your business, or we can provide some sample terms, or review yours.
Only sell to people who can afford your product/service and intend to pay you. Where you can, check your customer’s credit rating and payment history with other creditors.
Up to date accounting software
Ensure that your accounting software is up to date and allows for everything the Australian Tax Office wants you to record and track.
Invoice promptly – and tell them when payment is due
It’s simple. You won’t get paid until you issue an invoice. Issue invoices as soon as the product goes out, or the service is complete. Or, if you invoice monthly, this should be done within the first 3 days of the next month.
Always have a due date on the invoice to tell them when you expect to receive payment.
Offer Payment Options
If your product or service is a large cost to your customer, offer them alternate ways to make payment. The best way is to be paid by Direct credit, however by accepting credit card payments you may help some people pay you sooner than they could otherwise.
Have a systemised approach to following up with people who don’t pay you on time. You are not your customer’s bank. It’s not uncommon for a business to suddenly hit a cash crises and the owner to start getting on the phone to customers that have overdue payments in a panic. Very stressful – and hit & miss.
Have a system that includes:
Prompt Communication once the due date is past. (Give them a call, it’s easy for them to forget emails!)
Regular follow up phone calls
Written follow up – Emails or letters at appropriate intervals
Formal debt collection process when all else fails. Do what you threaten you’ll do and send the debt to professional collectors when all else fails.
Many of these steps can be automated. There is a Xero add-on called Debtor Daddy which can be used to send email reminders to your debtors automatically
Get the right person doing the job.
Debt collection isn’t easy for everyone. It’s also not always a good idea for the business owner to be doing it. Their relationship with the customer can make this difficult. Make sure you have someone who is capable, trained and enthusiastic to do the job. Make it a priority of their job, not something they squash in around other tasks (or avoid when they can).
If you don’t have anyone on your team who can do this for you, look at outsourcing it. There are various people that can do this for you as if they were one of your team.
Monitor & Manage
It’s easy to monitor the results of your Accounts Receivable and debtor management system. Learn to calculate Debtor Days as one of the KPI’s of the business. This is a measurement of the average number of days it takes a debtor to pay you. Obviously the lower this is the better.