Taking control of debtors

Debtors are like customers – life would be so much easier without them. Yet, just as your business probably operates (and in some cases survives) on credit, the reverse, whereby you have extended credit to your customers, also applies. This is likened to a merry-go-round, whereby you sweat on your customer paying their bill, so that in turn you have funds to pay your suppliers, who are in turn sweating on your payment so they can pay their bills, and so on.

 

Generally this works, but it can go horribly wrong. If your customer delays payment or goes out of business, you are left with a hole in your bank account and still receiving the nasty phone calls from your supplier. This can seriously hurt your business; strangling its cash flow and having your suppliers threaten to not extend you any more credit. Either way, you need to ensure you are on top of your trade creditors situation – managing debtors is just as important as making the sale in the first place.

So how do you manage your debtors effectively?

Firstly, you need to evaluate your current debtors and ask yourself if your customer is a late payer or a never payer. There is a huge, but not always obvious difference. Some of your customers simply have you on their merry-go-round and are awaiting payment before paying you. This is quite common and, as long as you know you are going to eventually be paid, there is nothing to worry about, apart from copping it from your bank manager about the size of your overdraft, your suppliers who are not getting paid and your nagging partner who has no housekeeping money.

The debtors you really need to worry about are those who are never going to pay you, generally because they are in financial difficulty. Unfortunately, when this happens you are usually not notified and are merely strung along with promises to pay. As you take your valued customer on face value, you may continue to extend credit, until the inevitable happened and they collapse in debt, leaving you at the end of a long list of unsecured creditors.

Obviously the trick is to manage your debtor before this happens. Although you may say that encountering bad debtors is the luck of the draw, there are a number of things you can do to make sure the odds are stacked in your favour when gaining a new customer, managing the customer and when they are in arrears.

The New Customer

There is no point taking on a new customer if ultimately they are not going to pay you. Yet it is amazing how many businesses are blinded by the sale without ensuring they will be paid. The main checks you should be doing before extending any credit are:

  • Run a credit check. This can be done by contacting either Veda Advantage or Dun & Bradstreet (preferably both). For approximately $30, you will receive a detailed history on your customer that lists instances of poor payment, bankruptcies or other adverse history. Another tip – ensure you run a check on both the organization as well as the directors/owners. As a general rule, a person’s personal credit history is generally reflected in the way their business conducts itself.
  • Request trade references. Their current creditors will be able to tell you much about your customer’s payment history. It is worth the effort to make a few well-placed phone calls.
  • Offer alternatives to credit. Gaining credit is a privilege, not a right. So why extend credit from the outset? If possible, and I stress only if possible (your competitive position may dictate a requirement to offer credit), offer them the ubiquitous credit card facility. Sure, it will cost you a two or four per cent merchant fee, but at least you will get paid upfront and with surety.

Your Current Debtors

Your sale is complete when the money hits your account and funds are cleared. If you have a sizeable debtors list that is another business risk you need to manage on a regular basis. The key actions to consider are:

  • Actively manage your accounts. Know and stay on top of your debtors. Know the average number of days for payment and if this is going up (bad) or going down (much better). Do not let a thirty-day account stretch out to forty before you do anything.
  • Know your customer’s business. Keep on top of both your customer and their industry. If you hear that their business is in trouble, has lost a major client, a competitor has opened down the road, or if the industry is in downturn, listen to the alarm bells.
  • Change your payment terms/methods. Why automatically offer a thirty-day payment period? If you can get away with it, offer a seven-day account. If possible, offer them an incentive not to go on credit by giving a discount if they enter into a direct debit agreement, or better still, payment on delivery.

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