Tips on managing debtors

Cash is the lifeblood of a business, so smart management of your debtors is crucial to success. Greg Charlwood, Asia Pacific CEO of global business finance provider, Bibby Financial Services, shares his tips on how to avoid a messy debtors book and better manage your cash flow.

Current economic conditions and uncertainty in the market has meant that many businesses are bracing for an economic slowdown. Greg Charlwood warns that 2008 will be a challenging environment for cash flow. “To compound the normal pressures of business, simple sources of cash flow are naturally affected in tight credit conditions. For example, it is common for invoices to be late during tough times,” he says.

The latest Business-to-business Trade Payments report by Dun & Bradstreet, the world’s leading source of commercial information, reveals that payment terms are increasing across all sectors in Australia. “The figures show the average payment term across all sectors has risen to 52.6 days–that’s almost four weeks above normal credit terms,” says Charlwood.

As a small business, you can avoid the worst of these precarious conditions by keeping a tight reign over your debtors book to keep the cash flowing. Charlwood says debt collection strategies will help keep you in the black.

Commercial furniture supplier Smart Seating, which services the aged care and healthcare sectors, is reaping the benefits of implementing a system for controlling debtors. As a result, the company’s current average payment term is well below the average at 36 days. Kurt Jones, director, says he has two key systems in place to manage cash flow–the use of debtor finance and strict control of debtors. “One of our key strategies for credit control is to always chase up overdue accounts on the due date and then on a weekly basis,” he says.

Efficient Systems

Charlwood shares additional tips for managing debtors in a slowing economy:

Check them out. Credit-check all potential customers. Risks must not be underestimated in the enthusiasm of taking on new business. Credit checks can be done quickly and are relatively inexpensive. It is important to establish the correct business title, together with its legal status (i.e., limited company, sole trader etc) before seeking reports from agencies or trade references. Awareness of your customer’s financial health can safeguard against unreliable debtors.

Clearly define credit limits. Always ascertain the expected size and regularity of orders. Use this to address the limits required. Set a specific credit limit for each customer and ensure you stick to it.  Never give unlimited credit.

Terms and conditions. Terms need to be set at the beginning of a relationship with a new customer and followed up with written confirmation. Terms of sale should be clearly and boldly stated on all relevant documentation, including on order acceptance and invoices.

Encourage fast payment. Include a provision for adding interest to the outstanding account to encourage on-time payment. Or consider offering early payment discounts if they pay within a certain credit period.

Understand your rights. If you have an outstanding payment, be aware that the law gives you certain rights. Be clear on your company’s legal entitlements concerning the Late Payment of Commercial Debt (Interest) Act.

Review. Remember that circumstances affecting existing customers are constantly changing. Aim to run credit checks on all your existing clients to ensure their financial situation has not altered.