The 7 steps to reducing debtor days
Two of the main challenges that businesses face today are late payments of outstanding invoices and bad debt. Both can lead to cashflow difficulties which could have a severe impact on any business, regardless of size.
Here we share 7 steps to effectively reduce your debtor days and taking back control of your cashflow.
Step 1: Only give credit terms to credit worthy customers
In times when winning new business is a challenge, we can often be quick to take the order or that piece of business. However, no business is good business if you’re not going to get paid, so make sure you’ve thoroughly checked their credit worthiness before offering them extended payment terms.
Send them a Credit Application form and ideally credit check them with a reputable Credit Report company such as CreditSafe.
If they don’t meet your predetermined criteria, insist on prepayment and perhaps offer to switch to a credit account after a certain period, once you’ve established a relationship and you feel more comfortable that they’ll be able to meet the ongoing payments.
Step 2: Implement a strong set of payment terms and stick to them
At the time of order or agreement to do business, make sure you have made your payments terms clear and they have been formally accepted by the client. Don’t rely on or accept verbal confirmation.
We have all been there: you’ve worked hard to win the business and you don’t want anything to potentially jeopardise the sale. Discussing payment terms and making it explicitly clear as to how and when you need to be paid can sometimes be brushed over, but if in the long term you have to chase payment then it is not good business. It’s time consuming and can drain resources, let alone affect your cashflow.
Step 3: Keep on top of overdue invoices
Like any problem, the sooner you address it the sooner it will be resolved; this is especially apt when faced with overdue invoices. Deal with late paying clients quickly, apply gentle pressure in a manner that is non-threatening, and you’ll soon see the pay-off in terms of quicker payments.
Step 4: Set up a process for chasing overdue invoices
As soon as a debt becomes overdue, send a well-crafted letter to gently remind the customer that their invoice payment date has passed. Most late payments are the result of customers simply forgetting or being too wrapped up in the day to day business, and a soft nudge may be all that is needed.
Don’t be heavy handed and be considerate to the customer’s potential situation. If, after a number of attempts to collect the payment, you still haven’t received payment, you can then begin with a more direct and possibly demanding approach.
Your customers are more likely to respond and appreciate this course of action as opposed to receiving a strongly worded letter demanding payment in the first communication.
If you don’t have a process in place, you can use our general Credit Management Process as a starting point.
Step 5: Keep accurate records and documents
Always put your communications in writing, either by letter or by e-mail. If you are faced with the problem of having to resort to legal action, this will prove invaluable and could be the difference between recouping the debt and walking away with nothing.
Step 6: Offer Early Payment discounts or rewards
Give your clients an incentive to pay quickly, or even better, offer a discount for prepayment of invoices. Some clients would welcome the chance to prepay so give them the option. Not only will this have an immediate impact on your cashflow but some clients may end up ordering more if they know they get a discount.
Obviously, you have to make sure you don’t give a discount that is too great. Always keep an eye out for your profit margin. But late payments also cost money, so normally you can afford a small percentage discount.
Step 7: Consider getting assistance with Credit Control or improve it in house
The best way to stay on top of things though whilst retaining control is to have a proper process with the correct letters sent at the correct time to the correct place. If you don’t have one currently, you can use our basic Credit Management Process. Or you can get assistance from a specialist firm such as ourselves. We do this every day and can usually do it much more quickly and efficiently than if you do it yourself. We also offer training if you want to improve your in-house processes.
Remember that it is also essential to Credit check all Customers before trading with them.
How can we help?
We can assist you with all the resource required to do this and can even provide the Credit reports via our Credebt Club, which will provide SME’s with everything they need to ensure they get paid on time, every time.
Our MD, Glen Morgan, wrote the Chartered institute of Credit Management’s Debt Collection syllabus which all students are currently studying, so trust us when we say we know what we are talking about.
Please remember that we are experts in this field and that we are here to help. If you want any assistance with any of these steps, feel free to contact us for a free, no obligation assessment of your Credit Control.
Call us on 0845-6385256 or email firstname.lastname@example.org