A recent survey by GoCardless and the Federation of Small Businesses (FSB) has found that 45% are experiencing more late payments than 12 months ago. This doesn’t surprise us at all. We are often talking to our clients about the importance of keeping on top of credit control to protect their cashflow.
The knock-on effect of not being paid on time is that your business could reach the point of being unable to pay your suppliers on time as well, and the problems have a ripple effect down the supply chain.
Debtor days.
Do you know what your current debtor days are? Do you understand how to calculate debtor days? Don’t worry, we’ll explain.
Debtor days are a measure of how long it takes for you to collect payment from your customers after a sale on credit. It’s calculated using this formula:
(Average Accounts Receivable / Total Credit Sales) * 365
If your debtor days are low and within your payment terms, it means your clients pay you promptly. If it’s high, it means they take longer, and this could have a negative impact on your cashflow, especially if those invoices are often paid past their due date.
What is a strong credit control process?
A strong credit control process is a combination of:
- Clear communication with the customer about your terms and conditions
- Sending accurate invoices on time
- Initiating proactive reminders
- Having a consistent follow-up process for managing overdue invoices.
Having these four areas covered should limit the potential for clients to pay their invoices late, but of course, late payers do happen.
Our team have created some top tips to help you keep on top of credit control, if your business regularly struggles with late payers.
Keep on top of credit control – Top tips!
- Keep your accounting software up to date.
It’s important to regularly explain the transactions in your bank feed and to match up payments received for invoices. Then, when you review the status of your invoices, you’ll have an accurate view of which invoices are overdue. It also means your calculation of debtor days will be accurate.
- Use automated reminders.
We highly recommend switching on automated reminders as part of your invoice settings. It means your clients will receive an email informing them that payment is due, or past due, without you having to remember or do anything. It saves you time and can often be the nudge that clients need to make the payment.
- Review persistent late payers.
Your accounting software can highlight those clients who consistently pay you late. Take the time to have a conversation with them. You might learn a bit about how they process invoices (and how to improve your chances of getting paid on time) or gain clarity on their financial situation. Use this to make informed decisions about how you work together in the future to minimise the impact on your cashflow.
- Overdue by 20 days or more? Help them pay.
If you have clients who are overdue by 20 days or more, you have a problem that will be impacting your cashflow. Rather than get angry or frustrated, you need to address the amount owed and find a way to help your client pay their invoice. Speak to them about the situation and rather than demand the payment in full, offer a payment schedule. Take a part payment immediately and agree (in writing) when the balance will be paid.
- Incentive early payment.
There are a number of ways to incentive a client to pay their invoice before it’s due. Check out our tips to help reduce your accounts receivable days here – “Know your Cashflow” blog.
Outsourcing credit control.
We understand that keeping on top of credit control isn’t always a nice task, and it’s not the reason you set up your business! Lots of companies have more success with credit control when it’s managed by a detached third party. The person chasing doesn’t have to feel awkward about asking for payment, and it can help to protect the client relationship in the long term.
Believe it or not, some people enjoy taking the role of credit controller, and we have someone in our team who is brilliant at it too!
If managing your credit control is becoming too stressful and time consuming, and you’d like to hand that responsibility over to a person with the right personality and skills, get in touch.
Allow our team to free up your time for the parts of your business you enjoy, knowing that the right communication and action are being taken with your clients to bring in the money you are owed.
Call Gillian and Chris on 01252 612484 today.
