Improve your debtor management

As a small business owner, managing your debtor management is crucial to maintaining your financial stability and keeping your business afloat.

You may not have realised your debtor management could do with improvement because you’re likely following the same processes your business has always done. But broader challenges, like the current macro environment, potential staff turnover, or your organisation experiencing a period of rapid growth, can have a significant impact on your cash flow and debtor management. With a few checks in place, you can overcome these challenges, free yourself up from unwanted admin, and create time and space to focus on activities that drive greater value for your business. 

With years of experience guiding customers on how to overcome credit risk, these are six top tips to help you manage your debtors more effectively:

Review your process – ensuring it’s not causing late payments and bad cash flow

Your business should have a well-defined debtor management process that’s easy to follow each month. It should guide your steps at every stage, from sending statements, to making calls, to moving customers through a flow that stops credit and escalates to debt collection when they’re well past their due date. 

Every step in your process should be decided in advance, then codified into your debtor management software so it’s easy to follow. You’ll know you have your process right when anytime you do debtor management it feels logical and effective. You’re simply following the next predefined step in the follow-up process for each overdue account, so there’s less pondering about what to do next. If you’ve got a team, then everyone knows their responsibilities and can be held accountable.

Keep an eye on the time required for debtor management – optimise wherever possible

Unless it’s a core part of your role and you have the right tools and training to complete it, debtor management can be difficult for a lot of people. It may feel like you spend too much time managing debtors, or not enough if other priorities keep getting in the way.

Good debtor management is crucial to protecting your cash flow and delivering a good customer experience. With a proper process in place, including a well-timed reminder workflow, it shouldn’t be a burden on your time. It should run fluidly, with your input only needed when bad debts need to be escalated or if disputes are raised.

 Set clear payment terms with your customers

One of the easiest ways to manage your debtors is to set clear payment terms from the beginning. Be specific about when payment is due and any penalties for late payment. Make sure your customers understand your payment terms and agree to them before doing business with you.

Invoice promptly

It’s important to invoice your customers as soon as possible after providing goods or services. Ensure you have the right payment method and bank account details on every invoice. Practicing both actions will help you get paid faster and avoid delayed payments.

Run a late payments reminder workflow

Don’t chase debtors with an ad-hoc system. Having a predetermined workflow takes the guesswork out of the reminder process. Knowing ahead of time at what stage in the cash flow cycle you’ll send invoice reminders to customers is crucial. Timing should be agreed across the entire team, whether that’s CFO, Finance Manager, Credit Controller, Owner/Operator or across other roles. This will ultimately save you time as you’ll know exactly how to escalate a bad debtor as they move through the workflow.

You can set up workflows and invoice reminders manually. But to really improve your process you can use tools to automate the reminders process. From pre-reminders right through to a debtor dashboard, these tools provide a consolidated view of your debtors. Implementing a specialist tool can also deliver better cash flow management. Automated collections tools employ all the best levers to get customers to pay such as including SMS  messages and scheduling phone calls into your reminder workflows.

Don’t extend credit to bad debtors

Pausing a customer’s account might not always be possible. But if you can do so, then pausing the account before a debt becomes overdue is a good idea. You can set this out in your payment terms, so that it’s clear for the customer from the outset.

Just like there are tools for debtor management, there are tools to help you predict the risk of customers, which can drastically limit the amount of bad debt you have on your books. One of the low-cost tools we offer, for example, helps businesses understand which customers are most likely to default in the next 12 months, so they can consider whether they want to start working with, or continue working with, such a business.

By following these tips, you can manage your debtors more effectively and avoid the financial stress that comes with overdue payments. It’s often said but staying on top of your finances really is key to the long-term success of your small business.

By Matt McFedries, Head of CreditorWatch Collect