Thursday, 30 June 2011

Cash Flow Management - Debtors

No cash in the bank! Scrambling around on the 25th of every month to find money to pay Salaries and VAT! The Income statement shows a profit every month and year but still the cash is not there to pay these crucial amounts due to keep your business alive.

Cash flow is a crucial element in every business. Constant management is essential. Over the next few Newsletters we will discuss a few tips to help improve cash flow in your business.

To do the work and invoice a debtor does not mean the business has earned the money. Generating a turnover of five million a year from debtors who will not pay, is not worth any "money in the bank". Bad debtors impact on cash flow. When viewing the age analysis monthly, make sure the ratio on the 60 days plus is below 10% of the total debtors. If possible do not allow debtors go over 30 days. If a debtor is consistently over 30 days without a prior arrangement in place, consider whether the debtor is worth keeping.
  1. Screen clients before commencing work. Make sure they have a good credit record.
  2. Obtain full clients details early.
  3. Invoice the debtor. (How often has a debtor not actually been invoiced?)
  4. Send statements regularly. Most debtors forget they owe money. Remind them regularly. Twice a month if necessary.
  5. Know who the contact person is. In some companies or government departments there may multiple contacts. Keep their phone numbers.
  6. If a debtor has not paid within 30 days phone them. Chase up the debt straight away. The longer a debt is left outstanding the harder it will be to recover.
  7. Debts that are older than two years are generally prescribed. Write them off. You have very little chance of recovering it. Concentrate on debtors where you can recover the funds.
  8. Review bad debts annually. Consider whether they should be written off.
  9. Do not do new work for a debtor who will not pay unless there is an arrangement in place. If they are not paying now it is unlikely they will pay later.
  10. 150 day debtors should be handed over to a collections department to recover. The debt should be written off in your accounting and placed on the collection debtors account for recovery.
  11. Consider an early payment discount.
A good debtors book will give an accurate reflection of what is expected in cash flow over the next few months. Knowing debtors and there ability to pay on time helps to plan cash flow.
Debtors that pay regularly and on time are the debtors worth keeping.

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