Helpful tips for managing debtors
Posted by Northadvisory on September 17, 2021
No business owner likes to chase unpaid invoices… it’s time consuming and stressful. Plus, it can create unnecessary tension between you and your clients if you have to constantly follow them up.
But having bills paid on time is an important part of managing your business cash flow. You need a regular influx of money to be able to pay your employees and suppliers… and if you have plans to grow your business, then you need the funds to invest. That’s why it is essential that you have a robust process for managing debtors.
The aim is to have your customers pay on time, every time… so here are some useful tips to help get the money in your bank!
If you are running a small to medium business, 30-day invoices are almost unheard of these days, so reviewing your payment terms is a great place to start.
There are several options available to you and it will depend on your business and the industry in which you trade, but here are some structures you could consider:
- Payment in advance – you can request a deposit or partial payment before you commence work for your client. A 50% up-front payment for custom products is certainly a reasonable request. In fact, depending on the product or service you provide, you could even ask for full payment before delivery. This certainly mitigates any risk of delayed payment.
- Cash-on-delivery (COD) – as the name suggests, this payment option requires payment upon delivery of goods or services. This is another helpful option to minimise payment delays.
- Progressive payments – if the service you are providing carries on for some time, you could implement a payment schedule. Rather than the entire amount being due at once, your client could make regular payments over the course of the job. This can help your client manage their cash flow, too.
- Seven, 10 or 14 day payment terms – start by assessing which of these terms would best suit your business and determine which clients you could offer it to… if you already have some late payers, then giving them additional time might not be a wise decision.
You must note that if you provide goods and services to certain types of clients, you might be subject to their internal payment cycle. For example, local councils, hospitals or schools usually have to send your invoice to a purchasing department and that could result in a significant wait for the funds. You should always discuss this with your client from the start, so you both have the same expectations.
If you do decide to offer terms to your clients, it’s a good idea to encourage timely payments. Perhaps you could give a discount to early payers or consider charging interest or a late payment fee.
Efficient invoicing is central to managing your debtors. It’s hard to get paid if you send your invoice to the wrong person or if it doesn’t have the correct information.
Start by making sure you have the right details for your client.
Whatever type of database you use, check that the name and email address are correct. If you need to send an invoice to a purchasing officer, rather than your direct contact, be sure to have those details on file, too.
Also, find out what information your client needs to make it straightforward for them to pay.
Do they have a quote or purchase order number? Do they have a specific product code or custom description? Anything that you can easily include on the invoice could save you time in the long run.
If you utilise an accounting system such as Xero, make sure you update your invoice template to look exactly how you need it and that you use the invoicing process within the software correctly. It makes everything more efficient when you need to reconcile your payments.
Another useful feature in accounting software is automatic payment reminders. If you set up accounts receivable automation, you can include your payment term policy and the system will chase outstanding invoices based on the parameters you set.
You could implement automated emails that go out a specific number of times and at intervals that relate to the invoice due date. A reminder two days before it is due and then regular overdue notices could help encourage prompt payment.
You might also want to set up an internal notification that alerts you to any overdue invoices. This way you can keep track of problematic payers or identify clients who might be having trouble finalising an invoice.
Make it easy to pay you
The easier it is to pay you, the quicker you’ll receive payment.
If you can, try to offer a variety of payment methods… cash, card, direct deposit, BPay, PayPal, Afterpay (or similar), payment plans or maybe even an old-school cheque.
Make sure your invoice clearly outlines accepted methods of payment and use technology to make the process quick and secure. A link to an online payment portal from the invoice will undoubtedly help.
Having options gives your clients the freedom to choose their preferred payment method and means they are more likely to regularly pay on time.
Talk to your customers
Finally, keep an eye out for warning signs that a client could be facing financial difficulties. If you have a customer who is regularly late or doesn’t pay at all, pick up the phone and give them a call.
Talk to them about the situation and try to find a solution… work with them to determine the best arrangement that suits you both.
It’s wise to stop supplying them until they have resolved the payments and, if possible, refrain from engaging a debt collector or other action unless it is the last resort.
We know that managing debtors can be challenging, but you should make it a priority if you want your business to succeed. If you have any questions about your business accounting, please contact our team… we are always here to help.