This is the third post in our new series on cash flow management, and in today’s post we’re going to take a look at credit control processes and how to make sure your invoices get paid on time.
We’ll also be discussing debtor days in this post – do you know your number? Read on for how to figure it out.
Part three: Those who shout loudest get paid first
If you’ve ever borrowed money from your friends or family, you’ll know how easy it can be to forget about your debt and only pay it back when reminded. Or to keep delaying payment because you’re a bit short of cash this month, or really need that new tyre for your car.
Well, it’s the same with customers and your unpaid invoices. Even if they have the cash, they might not pay your bill without a nudge – it just isn’t at the top of their priority list.
The key thing to remember is: those who shout loudest get paid first.
If you rely on your debtors to pay you without sending reminders, you’ll soon find your payment terms stretching into the distance. Chase those invoices until you receive payment (in full) and never let your customers forget to pay you or let your bill fall to the bottom of their list.
Offering credit to your clients is a huge perk and a nice way to reward loyal, trustworthy customers. But, at the end of the day, it’s equivalent to giving them an unsecured loan. You’re taking on all of the risk and they’re getting all of the benefit.
If you’re still adamant that you want to offer credit, you need to set out a policy with strict terms and conditions, and stick to them.
- Figure out how long you can afford to wait for payment, and make sure your payment terms are shorter, as many invoices go unpaid for weeks or months after the due date. If you can only afford to foot the bill for thirty days, make the payment term fourteen, or even seven.
- Decide on the repercussions for customers who don’t meet your terms, whether it’s a late payment fee or revoking their right to credit, and enforce them.
- If a customer continues to pay later and later, consider ending the relationship entirely. A client is only as good as his word, and if they’ve consistently broken that word by paying late or underpaying, they’re not a customer your business wants to have.
A detailed credit control procedure is key to success, and ideally you’ll have someone else chase your invoices for you, as customers can be tricky to get hold of when they know they owe you money. If hiring a credit controller isn’t in the budget right now, dedicate one morning or afternoon a week to chasing payments. It might seem like time better spent doing client work or following up on quotes, but if you don’t get paid for the work you do then there’s no point in doing it.
Your ‘debtor days’ refer to how long on average it takes for your invoices to be paid. It’s an indicator of how much cash your business has tied up in unpaid invoices. Here’s how you calculate your debtor days:
Debtor days = (Accounts receivables/sales) X 365
So, for example, if you’re currently owed £100,000 then you divide that by your sales for the past twelve months, let’s say £1m. Then you times that by the number of days in a year, and it gives you your debtor days – 36.5 days.
If your payments terms are 30 days then you’re doing okay, if they’re seven days then you might need to improve your credit control process in order to avoid a negative cash flow.
In the next post in our cash flow management series, Must Have or Lust Have, we’ll be talking about budgeting, prioritising, and investing in your business.
Don’t want to wait? Click here to get our guide, Happiness is a Positive Cash Flow.
Get in touch if you want to discuss your individual circumstances and get some impartial advice on the cash flow issues in your business.