Tips to Reduce Your Debtor Days
Cashflow is the ongoing process of ensuring that the business has the available cash (or ‘liquid’ cash) needed to operate. This provides the money needed to trade, to pay suppliers, to cover wages or to buy raw materials etc. Establishing how long it takes you to get paid is the first step, but how can you measure this? The simple answer is in Debtor days.
Debtor days measure how long your customers take to pay you. You should measure this monthly after you’ve completed your invoicing and your reconciliations for the month. Find out here how to calculate in a simple way.
Calculate Debtor Days by: current debtors owing/annual sales * 365.
For example, if you have annual sales of $900,000 and debtors owing of $130,000, your debtor days are 53 ($130,000 / $900,000 * 365).
In this example, if your payment terms specify payment within 14 days, then you are likely to have a cashflow problem because you’ve already paid your team to do the work, and/or paid your suppliers for the materials – both examples of cash going out of your business.
If we can reduce debtor days from 53 to say 40 (still well beyond your payment terms of 14 days), you’d have over $32,000 more cash in your bank account.
Reducing your debtor days will immediately free up cash.
Follow these Tips to Reduce your Debtor Days
1. Payment Terms
Review your payment terms and terms of trade. This will depend on the type of business you run but moving customers who currently pay on 20th of the month following to 14 days after receiving the invoice will make a real positive difference to your cashflow.
2. Format your Statements
Have statements with only two columns. One for current and one for overdue. Columns showing 60, 90, 120 days create the perception that it’s acceptable for your customers to pay you in this extended timeframe.
3. Ask for a Deposit
Ask for a deposit before you start work. If you have cash going out of your business in the form of salary/wages or contractors, and payments to suppliers for materials and other inputs that will be used on the job, then a deposit can cover some or all of the net cost of these.
4. Work in progress
Keeping work in progress moving through the pipeline (minimising your order to delivery timeframe) will help you get paid faster.
5. Invoice as you go
If you do have jobs that take some time, or you have work in progress that is halted due to supplier or shipping constraints, consider invoicing progressively throughout the job to keep cash flowing. You’ll also be able to see early on if you’re not getting paid.
6. Stay on top of debtors
Get on the phone early to your overdue debtors. If your debtors have cashflow challenges of their own, it’s often the squeaky wheel that gets the oil (gets paid).
7. Outsource debt collection
To maximise your time in your business, consider using an outsourced debt collector, or at least a different member of your team to follow up payments.
8. Stop work for non-payers
Don’t keep working for customers who don’t pay their invoices.
9. Discounts for upfront payment
Although we are not a big fan of discounts, you could offer a discount for an upfront payment. ie. offer a lump sum up front payment at a rate that is lower than the sum of a series of monthly payments.
10. Payment options
Make it easy for your customers to pay you – credit card, direct debit or automatic payment. Or consider e-invoicing – the digital exchange of invoice information directly between buyers’ and suppliers’ financial systems, even if these systems are different.