Debtors And Their Effect On Your Business

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There’s an old joke that goes something like: please pay me so I can pay them so they can pay you!
But when we look at that little phrase a bit more closely, what at first seems like a bit of a throwaway funny is actually the sad truth. Everyone and everything is connected in business, and one late payment can start a debt filled ball rolling down a very bumpy hillside.

In order to really get to grips with your business’ finances, you’ve got to work out your debtor days (the amount of time it takes for people to pay you), and work on reducing them. The quicker your customers pay, the better your cashflow will be, meaning that you can pay your suppliers, and in the end that can mean that difference between a company that survives, and one that goes under. The numbers can look excellent on a spreadsheet, but just because you’ve sent out the invoice does not mean there is money in the bank, which is something that many business owners often fail to remember.

Many business work by giving credit – often 30 days from the date of the invoice, and, naturally, they want to be paid within that time frame. Equally as naturally, those who owe the money want to hang on to it for as long as they can, and this can mean that the terms of payment are extended, albeit without prior consent.
There are, however, some ways to lower those debtor days. They’re not a magic wand to wave over your customers, and they might not persuade them to pay up, but they could make a big difference to your bank account, and your own good standing with your suppliers.

Have you considered offering an early settlement discount? Basically, this means promising to lower the amount invoiced by a certain percentage as long as the amount is paid within 30 days (or whatever terms you have set). If the bill still hasn’t been paid after 30 days, feel free to charge the original, full amount.

For persistent late payers there are a few things that can be done, depending on how ‘harsh’ (don’t forget, they owe you money for a product or service, so don’t be shy in asking for it) you want to be. You could reduce their credit terms, lowering them from 30 days to 15 (for example). You could put their account on stop after a certain amount of time over when they should have paid. And eventually you can ask for payment upfront, using a proforma invoice. They may not like it, and they may go elsewhere, but if they weren’t paying anyway, is it really that much of a problem? It’s your call, but you need to get that money somehow.

Which is when we come to another option – debt collectors. There are numerous firms around whose job it is to chase up your debts for you, and they’re good at what they do. They will, however, take a cut of any money they recover, so you’ll need to do the sums and see if it’s really worth taking this course of action.

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