Focus on Cash Flow: Optimising Debt Collection

Are your debtors using your money to fund their business? Implementing a combination of preventative measures and monitoring initiatives can help minimise the risk of bad debts and optimise cash flow to your business. Here’s how…

In previous blogs I’ve talked about why cash flow forecasting is important and how to prepare a cash flow forecast.  I’ve also discussed some guiding principles on cash flow optimisation. Now it’s time to get into the detail, starting with debtor collection.

I’ve never met someone who enjoys debt collection. That horrible feeling of having to telephone and ask for money (or worse: visit and ask in person!) and the underlying fear of “what if they are no longer in business?”

As a business owner, what can you do to improve the performance of your debtors?

Prevention is always better than cure – if you don’t provide credit to risky customers you won’t have to worry about them not paying.

Here are some ways to improve the calibre of your customers:

  • Ensure credit checks are undertaken for all new customers
  • Rank customers by credit risk (e.g. length of time in business, quality of their bank credit reference) and set credit limits for each customer based on their ranking
  • Review each customer’s credit risk ranking at least annually, and amend as necessary
  • Understand why your customers are coming to you – has their normal supplier stopped supply?
  • Be aware that customers with poor credit history may open up new accounts for small transactions and then attempt to increase the credit limit.

Compiling an acceptable customer base is generally a one way street – either you accept the risk of selling on credit, or you don’t.

But once you’ve agreed to provide credit to a customer you must provide them with the information they need to meet your payment terms. This will prevent frustrated customers from taking their business elsewhere.

Here are some monitoring initiatives to consider:

  • Issue invoices immediately rather than weekly or monthly
  • Ensure payment terms are documented on invoices
  • Ensure accounts receivable staff are aware of the payment terms attached to the various customer risk categories, and that these are enforced
  • Implement follow up procedures for overdue remittances (e.g. telephone calls, reminder letters, legal action, stop supply)
  • Consider implementing discounts for early payment/automatic interest and penalty charges (if discounts are offered, margins must first be understood to prevent excessive erosion).

It doesn’t stop there.  Like all successful relationships you need to nurture your relationships with your key customers.

Here are some client relationship tips:

  • Meet significant customers regularly on their premises. Understand their business and financial position
  • Identify and proactively manage slow paying customers (e.g. implement payment plans)
  • Ensure there are processes in place for customers to communicate and resolve non-performance issues (e.g. late delivery) so they don’t use them as an excuse not to pay
  • Proactively manage customer expectations (e.g. communicate anticipated delays)
  • Ensure it’s easy for customers to pay (e.g. EFT, credit card options).

As always, not all of these strategies will apply to every business.

It’s important to focus on the fundamentals: only provide credit to worthy customers, ensure your customers are aware of their obligations, enforce credit limits and continuously build on relationships with your customers.

Understanding your customers’ needs is the best way to discover further business opportunities.

Stay tuned for my next blog where I look at best practice on how to manage your business’ creditors and suppliers.

Elizabeth Mawby was a former Client Director at Vantage Performance, one of Australia’s leading turnaround management and profit improvement firms – solving complex problems for businesses experiencing major change.

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