Minimising your Debtors: 10 Quick Tips to Improving Cash Flow for your business

By Aidan O’Byrne of OBK Accountants. 10th January 2014.

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                        Making a sale is great and new start-up companies get a terrific buzz when they execute their first few sales. However, in truth the sale is only really good for your business when you’ve collected the cash and are able to use the proceeds. Here are 10 quick tips for minimising your debtors and thus improving your cash flow:

1. Bill Promptly

How many small businesses make sales daily but only do one billing run a month? The clock only starts ticking from the date of the invoice so make sure your staff have billed all appropriate transactions as soon as possible. If you are a service business don’t let significant amounts of unbilled Work in Progress build up.

2. Bill Accurately

One of the most common reasons bills are not paid is that there was an error in the quantity supplied or the price charged. Make sure your bills are correct for pricing and quantity. Review the amount of credit notes that you have to raise and if they are significant then you’ll know that your billing processes are flawed. Remember you might bill for 100 products, if one is wrong then the whole invoice is held up for payment not just the one wrong item.

3. Think long and hard about your credit terms

Let’s assume that your business has to grant credit to its customers. Make sure you understand the impact of your terms. Thirty days from date of invoice is a lot better than end of month following (which effectively grants between 30 and 60 days credit depending on when the invoice was raised). Make sure that your credit terms to your customers are consistent with the terms granted to you by your suppliers. There is no point granting your customers end of month following terms when you only get 30 days from your suppliers.

You should also consider having some form of early settlement discount for payment within say half of the credit term. This could be 1 or 2% – it shouldn’t be too excessive

4. Have formal credit check procedures

If you are granting significant levels of credit to a customer make sure that you have done a simple credit check on the customer. Agencies such as  Stubbs Gazette have excellent reports that can be obtained on whether a customer has a chequered financial history.

5. Have Credit Limits appropriate to the level of business a customer will have with you

With all modern accounting packages credit limits can be inserted which may block trading with a customer once they have reached their credit limit. It is therefore necessary to ensure that the limit is appropriate and that it can be varied to take account of seasonal factors. Do not grant a customer €50,000 credit all year just because they do a large amount of business just before Christmas and pay in January.

6. Have formal debt review procedures

If a customer is late in paying their debt have a formal step by step process as to how you will recover the debt. This should include telephone, email, letters and legal correspondence. Often in today’s straightened times customers will only take your demands for payment seriously when you escalate them to something  approaching  legal correspondence. In addition when communicating with a debtor always has full access to what’s outstanding, copies of invoices, dates due etc, it reduces their ability to stall you.

7. Have Customers Pay by Direct Debit

Getting customers to sign direct debit mandates reduces (but doesn’t eliminate) credit issues as you run the Direct Debit process when the invoice is due and, providing there is appropriate funds the customers bank pays you your amounts due. There is a cloud on the Direct Debit horizon in so far as the proposed SEPA payments legislation which commences in 2014 would appear to grant customers an 8 week time period where they can have a “No Questions Asked” refund on a direct debit.

8. Process Credit Notes Promptly

We all make mistakes and sometimes we bill incorrectly. The only way to get your invoice paid is to promptly issue an agreed credit note and liaise with your customer to make sure that they will pay subject to receipt of the credit note. An invoice with an outstanding credit note query on it will never be paid

9. Develop a rapport with the person who pays the bills in your customers’ organisation.

Firstly, find out who actually determines when you get paid, then develop some rapport with them. This improves the link between the businesses and improves your chances of getting paid.

10. Have Days sales outstanding as one of the main KPI’s on your performance dashboard

The old saying “what gets measured gets managed” comes to mind. If you include days sales outstanding as one of your key metrics and set a target for same the chances are that whoever is responsible for collection of cash will make extra effort to ensure that their performance meets expectations. 

For more advice on Working Capital and for  all your company accounting and consulting needs please contact Aidan O’Byrne of OBK Accountants at or on our website

Date Added: 13 Jan 2014

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