Fixing Debtor Disasters
Make no mistake about it, debtors can impact your cash flow in a big way. We see this most predominantly in small business, where the owners are getting the business into motion. This problem can seem insurmountable without taking bite-sized chunks at the problem. The important thing to remember when you are getting those products out the door or services completed is that those basic business procedures are key to having your business functioning sustainably.
Xero, the largest cloud accounting software provider in NZ, reported that from January 2015 to September 2017 30% of invoices were paid more than 7 days late. This equates to an average of $3,000 in overdue debtors for every small business a month. 97% of business in NZ are small businesses employing 40% of the workforce. Data out of Australia shows that inadequate cash-flow is the leading reason for business failure. No different here in NZ. Businesses need to be paid by due date so they can pay their employees, pay the rent and pay their creditors – it's that simple. Many businesses fund their “cash flow blockage” by going to their Bank for an overdraft facility which is generally secured over the business owner’s house, not ideal! So – here are six practical ways to solve your debtor disasters.
Get invoices out promptly. Set time aside in your diary where nothing else matters but making sure that you invoice regularly and accurately. There is something worse than not sending the invoices – it’s getting the invoice wrong. Check, double check and where you can – automate the process.
Raise the invoice when you are packing your order and send it with the goods if you are a product based business. If you are a service based business, date the invoice from the day the service was completed rather than the standard “last day of the month”. Set the expectation high, and people tend to pay quicker.
Consider changing the terms for some customers. Moving from 14 days to 7 days may whip them into shape. If you haven’t already got some very clear policies and strategies to debt collect – procrastination, unfortunately, isn’t an option for you. Priorities this action, get help if you need to, just get it done!
Follow up promptly when invoices aren’t paid on time, this can be automated from your Xero account. In fact, you can set up several reminders until the account is paid. Be polite but firm. If you can’t afford the time to make phone calls – you can outsource this to companies like Debtor Daddy.
Make your percentage of debt as a KPI. The amount of money received divided by the amount of debt still owing gives you a percentage. If you can keep this lower than 10% you are doing well. This is also a good way of keeping on track with your overall goals. You can do this with the average age as well.
Consider offering a discount for prompt payment. Although this isn’t a good idea for low margin business, however for high margin operations this may be just the ticket. Please make sure this is part of your costing analysis for your product or service. If you need some help with this, we are always here to help.
If you are stuck with this particular situation and need some advice, please don’t hesitate to give us a ring. Together we can make a plan to help you become a cash flow king… or queen.
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