Reduce debtor days to improve cash flow

Reduce debtor days to improve cash flow

Cash flow is king in any business. Yet cash flow is one of the areas that many businesses struggle to manage.

Customers and clients can be reluctant to part with their money, even if it’s to pay for your goods or services. As such it can take a while for them to pay their invoices.

While longer debtor days might not be a big issue for huge international corporations, for small and medium size businesses, it can be a very real source of stress. You need to receive payment as quickly as possible so that you can continue to run your business.  It’s easy to find yourself working extra hours chasing up late payers.

Here are a few tips to help you to reduce your debtor days:-

• Be clear and concise 

Think about your messaging when creating an invoice. Is the due date easy to see? Does your invoice state exactly what payment is required and have you clearly outlined the various payment options that you accept, such as bank transfers, cash, cheque, etc? Options such as “pay now”, “pay by instalments” or “pay on the due date” should be clearly set out.

• Offer incentives

Sometimes offering a small discount can motivate your customers/clients to pay on time. Offering say, 5% off the total bill for debtors who pay within two weeks of the invoice date can help a business to get cash in quicker. Setting this type of incentive out at the beginning of a business relationship can go down well as customers/clients can see the early payment discount as a “value add”. 

• Charge fees for late payment

Incentivise debtors to pay you on time by charging a fee for late payments. If you communicate the terms and conditions around late fees clearly, it will not come as a surprise if they are charged for late payment.

If you are going to charge for late payment, it is usually effective to give some sort of warning. It may be helpful to send an email saying that “payment is due in 10 days’ time and if it isn’t received, a late payment fee will be applied.” This gives the customer/client an opportunity to respond.

• Embrace technology 

There are a vast array of systems available to help businesses to track invoices, monitor payments and manage debtors who have missed payment deadlines. With an automated accounts receivable system, you can keep track of the status of each invoice, who has paid and what is outstanding.  You can set up automatic reminders at crucial moments in the payment cycle and significantly reduce your administration time.

By implementing the above strategies, you can reduce debtor days in your business and ensure that you are getting cash in as quickly as possible.

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