One of the effects of the GFC was the blow out in debtors’ days and although, according to Dunn and Bradstreet, they have improved slightly in recent times, falling from 56 to around 53, it’s still too high and continues to squeeze the life out of many businesses.
Currently over 1000 companies go into external administration every month, which is a significant increase since 2010. Business failures are now higher than during the GFC, with over 80% due to a lack of cash rather than poor sales.
But don’t despair, there are a number of cost–effective, high payoff tactics you can employ that will dramatically reduce your debtors days and get that all important cash back in your bank account where it belongs.
The key roles and responsibilities are:
Business Owner / General Manager: Must motivate staff, agree on targets and monitor progress e.g. a 5 day reduction in debtors days for each of the next three months.
Accountant / Office Manager: Monitor cash flow and own the debtors collection process. Must ensure tactics are in place to meet the targets.
Sales Manager: Your team must ensure that customers are credit worthy and their accounts will be settled when they fall due.
With these foundations in place, you can start to implement debtors reduction tactics. Now, this is both a science and an art as you combine common sense tactics with the art of being insistent without being offensive.
- You can’t control what you can’t see
Visual management isn’t just a buzz word; it’s the key to lean management. The use of real time dashboards that monitor your debtors situation are a must have in today’s world of thinning margins and increasing cash flow pressure. They enable both management and staff to see at a glance what needs to be done without the need to be told or run reports. - Make it easy to pay you
Your invoices and statements need to clearly show all the information that makes it easy for your customers to pay you, such as:- Display the due date near the invoice total.
– Display payment methods such as bank account and BPay details on invoices.
– Show ageing on statements as current and overdue. The old 30, 60 and 90 day encourages late payment.
– Send statements. Most firms now delay payment until they receive one.
– Don’t wait to send all your invoices at the end of the month as you risk missing a customer’s payment cycle.
- Make follow-up a routine
Customers usually pay the ‘squeaky wheel’ first, so it’s important to have a strict routine of overdue account follow-up. The key is to maintain a consistent approach throughout your organisation, ensuring clear but friendly communication with customers. It’s the art of being insistent without being offensive.
- Customer checks before shipping
The best time to collect an overdue amount and “reset the payment rules” is when customers are placing an order or making an enquiry. You should automatically check their account ageing, credit limit, any disputes and even use risk tools to flag customers before credit issues arise.
- Reducing errors
It may seem like the obvious, but reducing errors also speeds up payment and reduces the risk of damaging goodwill that may have taken years to build up. Two of the most common errors are wrong price and wrong product or quantity. Regular special customer pricing should be automated and emailing order conformations can have a significant impact on reducing errors.
- Customer Relationship Management (CRM)
A Customer Relationship Management (CRM) strategy and associated software is a ‘must have’ for most businesses today. They help increase sales and can also help reduce your debtors. You can embed CRM within your financials so everything is in one database. This gives instant access to customer contact details, payment discussions, plus past orders and invoices without having to find ‘the paperwork’ or ask other staff for help. You can also create a ‘to-do-list’ for following up overdue invoices.
In the cut–throat business environment in which we operate, where every competitive advantage is worth its weight in gold, getting your debtors days down to the minimum is a low–risk high–return positive activity that frees up cash, reduces funding costs, improves cash flow, increases profit and lowers your level of stress. Sounds like a smart business decision to me.
Over 110 tactics to help reduce your debtors are in the Business Improvement Guide. It especially targets businesses with annual sales over $1 million (and their advisors) and shows how technology can automate each tactic. The $150 Guide is available FREE by calling Page Business Solutions on 1300 730 992 and saying you read about it here.