This article was originally created for Hayes Knight (now Nexia Auckland).

13 June 2016
By Tristan Dean – 13 June 2016

A large part of keeping cashflow under control is managing your accounts receivable. Many businesses will generally take as much time as they possibly can to pay your account, after all, why pay interest on an overdraft facility when they can use your cash for free?

Good receivables management can start with a very simple calculation to measure ‘debtor days’.  By dividing the month end balance of your debtors by your average daily trading, you can get a simple measure that management  can monitor on an on-going basis.  If the number of days goes up, you know that people are taking longer to pay you and you need to investigate, if it is going down, you know that you’re getting more efficient at collections.

As a simple example, let’s say a business is turning over $10,000 per business day and has a month end debtors balance of $600,000.  This would equate to having 60 days trading revenue tied up in receivables.  If, over time, you could get this down to say 45 days, the business would have another $150,000 in the bank account rather than tied up in receivables.

So, how do businesses make people pay them on time?  Here are a few practical things that will help:

  • Make payment expectations clear on your invoices and Terms of Trade.
  • Within your Terms of Trade include a time frame within which any queries relating to your invoice must be raised.  It is always frustrating for a query with your account to only be raised when payment is already several months overdue.
  • Reserve the right to charge interest on all overdue accounts and specify the rate that will be charged.  You should also advise that any other costs incurred in the collection process will be passed on.
  • Send invoices out promptly, preferably at the time of supplying the goods or services or if invoicing monthly, very shortly after month end.
  • Make it as easy to pay you as possible.  It is essential that bank details are provided on invoices and statements.  Allowing payment by credit card is also a valid option, which can have great results, although take into account the fees that you will incur.
  • Make sure that you have a documented collections system and follow it.  A standard process will include a time line of follow up letters, emails and phone calls that ultimately lead to interest and collection costs being added and the account being handed to a collections agency.
  • Get tough!  If you give someone a final date on which the account will be handed to a collections agency, actually hand the debt over for collection if it remains unpaid.  Many businesses talk tough but will then not actually follow through.

As with all things in business, a bit of common sense and compassion also goes a long way and, while not ideal, sometimes you need to bend your own rules on collections when a good client or customer is struggling and needs a bit more time than usual to pay.  As long as your customers are communicating with you, being honest and making the payments that they have committed to, then be prepared to cut them some slack occasionally to preserve good relationships.   However, the moment that commitments are broken or communication stops, it’s time to move quickly to secure your position.

Tristan Dean Business Advisory Director
T +64 9 414 5444

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This article was originally created for Hayes Knight (now Nexia Auckland).