How to Reduce Debtor Days for Small Businesses
Why reduce Debtor Days?
Small Businesses play a key role in the economy. Many SMEs that struggle with cash flow because of late payments from their customers. As a Business Support Centre, we think it’s important that we highlight the problems with long debtor days and how to reduce them.
What are debtor days?
The term debtor days refers to a measure of the average number of days it takes a business to get paid after invoicing customers. Businesses that offer invoice payment terms don’t always get paid by the invoice due date. Up to 50% of SME customers don’t pay on time. This means that businesses that expect payments in 15, 30, 60 or even 90 days must wait even longer for their money to come in. As a result, cash flow is negatively affected.
What is the true cost of late payments?
Besides reducing cash flow, late payments can cost businesses in many ways. There is the time and cost involved chasing payments, the interest cost of finance that is needed to maintain cash flow and the lost opportunity costs resulting from not having the funds to invest in business growth.
Ways to reduce debtor days
Given the cost of high debtor days for small, here are a few steps that can assist in reducing work in progress and debtor days:
Document credit policies and procedures
Clear credit policies and a clear internal debt collection process will help lower the average debtor days and bad debts. These should outline payment terms and the steps to approve new clients, including completing credit checks and screening out risky clients.
This should be backed up with timeframes and action steps when accounts are overdue, such as when to stop future work and when to refer debts to third parties for collection. A set process is key to effective action when payments are overdue. Credit criteria and actions removes the emotions from decision making, to learn more see: Do you want to learn how to set up a debt collection process for your SME? (recoupcentre.co.uk)
Clearly communicate payment terms for new customers
Once a client has been approved for payment terms, it’s important to make sure that these are clearly communicated up front. This should be clearly stated in the credit application completed by the client to avoid misunderstandings about when work is invoiced and when payments are due. Having a documented credit policy from the beginning will prevent confusion that can delay payment.
Invoice regularly for services
Regular invoices with payments details will improve cash flow and avoid surprising the client with one large invoice.
Bill immediately when work is completed
After completing a project or supplying goods, billing the customer immediately creates a sense of urgency and enables the client to connect the invoice to the good or services supplied.
Make it easy for clients to pay you
Making it easy to pay invoices will help to reduce debtor days. This includes offering several payment options, including bank transfers and credit cards. Make sure the amount, payment terms and payment options are clearly displayed on the invoice. Include contact details for clients to get in touch if they have any questions.
