When we review business performance and cash flow, we often see a variance being accounts receivables payments - specifically when customers are paying their outstanding bills.
Why Debtors Are Important
When customers don’t pay on time it puts stress on other areas of cashflow such as credit, overdraft, other supplier payments, and tax & GST saving. There is often no correlation between getting paid and incurring expenses - you will incur expenses whether you are paid or not so it’s best to have a plan and a process to make sure you do.
Getting customers to pay on time means your business will have better cashflow, meaning funds are able to be applied to staff payments, suppliers and tax & GST.
Ideally you would be collecting any outstanding invoices at least on the 20th of the month. Therefore a useful metric would be to compare your outstanding at the end of the month, compared with what you collect in the following month - obviously hoping for 100%.
A useful metric we use to track this is Debtor Days, which is the average time (in days) that it takes for a customer to pay you after invoice date. Watch how it is calculated though, as all invoices might be treated equally - a small recurring payment, such as a weekly retainers are treated the same as a large one-off project invoice.
While the options are limited when a customer refuses to pay, business owners will often neglect to gently remind customers of outstanding invoices, often preferring to do more interesting work and get around to it later.
These are steps we’ve found to get customers to pay faster and on time:
Touching base with a customer before a large bill is due lets them know that prompt payment is important to you. It also front loads stress, meaning any problems can be dealt with in advance rather than being an afterthought.
Follow Up Regularly
Customers might have a lot going on and can simply forget to pay you. Having a regular reminder system to follow up overdue is key. Simply set up a calendar reminder, and send overdue statements on a regular basis.
Prompt Payment Discount
We’ve seen customers fall over themselves to take advantage of a 2.5% - 5% prompt payment discount, especially when they’ve been really late in the past. In order to select the right discount you’ll need to take into account profitability, and time saved in not having to follow clients up.
An effective measure is to set a date when service will be put on hold until the outstanding bill is paid. This needs to be set in advance, or you’ll “give it another week” and neglect to stop payment until it really becomes a problem.
Improving when customers pay you, will improve your cash flow. Lowering your outstanding amounts to customers will mean you need to draw less on sources of credit and savings.
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