Managing debtors effectively in the current business environment is crucial for maintaining a healthy cash flow. With the current cost-of-living crisis and interest rates remaining high, businesses are feeling the pinch and may notice customers taking longer to pay.
Adopting best practices for managing debtors can significantly improve a business’s ability to collect payments on time and minimise the risk of bad debts.
In this article we outline some of these key strategies that you could apply to help improve your processes.
Invoice accuracy and timeliness
Ensure that invoices are clear, accurate and sent promptly. Errors and missing information can delay payments and create confusion for the customer.
Technology and automation
Using digital invoicing systems such as MYOB or Xero help to streamline the process and reduce the chances of delays or lost paperwork. Many invoicing platforms offer features like automatic reminders and statements (e.g. Fee Synergy). This reduces manual intervention and ensures no debts are forgotten by customers.
Online payment systems
We are often creatures of habit. The older generation may prefer traditional methods like a post office payment while the younger generation might prefer digital methods such as PayPal, Bpay, AfterPay, ApplePay. Others will lie somewhere in the middle like credit card or bank transfer.
Offering the widest, most convenient, range of payment methods will prevent customers from putting off payments due to perceived difficulty and help reduce delays. A focus on online payment systems is particularly important.
Subscription models
Rather than one large invoice, consider ongoing monthly, fortnightly, or weekly subscription models, particularly for recurring services. This ensures predictable cash flow and timely payments. This also helps smooth the expenditure and cash flow for the customer.
Incentives for early payment
Offering small discounts for prompt payment can incentivise customers to pay faster. For example, a 2% discount for payments made within 14 days of invoice date (depending on the terms of business).
Risk assessment
Before undertaking work with potential customers, perform relevant credit assessments, particularly if you deem them higher risk. Request full, or half upfront payment if necessary. If the customer poses minimal risk, avoid being too aggressive with your checks however as you risk scaring them off.
Dispute resolution
Addressing disputes quickly and professionally is important. A delay in resolving disagreements over an invoice can extend the time it takes to receive payment.
Personalised follow-ups
While automation is important to remove the manual labour, for certain clients use a personalised approach when following up – such as calling or emailing. Tone and clarity in communication matters. It’s important to maintain a professional but friendly manner. Some customers will ignore an automatic reminder to make payment, but a direct human email or phone call can motivate an quick turnaround in payment.
Flexible payment plans
If a customer is facing financial difficulties, work with them to create a customised payment plan that enables them to clear outstanding debts over time, reducing the risk of defaults.
When offering a payment plan, we advise you to be vigilant. Ensuring your client doesn’t misuse this option by regularly requesting a payment plan when they may not necessarily require one. This option should only be used for temporary struggles or one-time larger fees.
Additionally, you could consider subscriptions model if clients would prefer regular monthly, or fortnightly billing. This would allow half the payment in advance and half after completion of work, or all the payments in advance.
Debt collection agencies
If internal efforts fail, it may be time to bring in a professional collection agency. Agencies are experienced in handling tough collections and may increase the likelihood of recovering outstanding amounts. The debt is essentially sold to these credit agencies. It is important to note that in the instance that the funds cannot be recovered, your business will be required to pay back the money to the engaged agency.
Utilise legal and contractual protections
Include legal clauses in contracts regarding payment terms and consequences of non-payment. This can serve as a deterrent for customers and intentionally delay payments. In some cases, you might need to engage in legal action to recover debts. If so, having a legal framework in place to pursue unpaid debts can be a last resort.
Next steps
In today’s dynamic and sometimes volatile business environment, effective debtor management is key to success. By setting clear credit policies, maintaining strong communication with clients, leveraging technology to simplify processes, and proactively addressing overdue accounts, you can mitigate the risks of unpaid debts and ensure a steady, healthy cash flow for your business.
Speak to a Nexia advisor if you would like support managing debtors effectively. Our experienced teams can provide guidance, so you focus on your business.
