This article was originally created for Hayes Knight (now Nexia Auckland).
Home > Updates > Collecting the Cash – how you can make sure it keeps coming in
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:
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 E email@example.com