Debtor management is a crucial part of any small business. There is a lot of pressure on small business owners to get paid by customers, and for good reason. Businesses can’t afford to take the financial loss from unpaid invoices. In addition, it’s been shown that when customers are late in paying their bills, they’re more likely to be late again in the future. So what steps should you be taking?
The goal of this blog post is to provide the reader with an overview of how to get paid on time by their customers and what they can do if they are struggling with collecting payments from their customers. We will cover topics such as when it’s appropriate to send a past due invoice, how long you should wait for payment before sending a reminder, and more!
What is debtor management
Debt management is the process of monitoring what people owe your business. It helps you get paid faster and prevent bad debts. When communicating payment terms with customers be clear to avoid any misunderstandings that could lead to late payments or even worse “bad debt”.
The idea behind debtor management is to minimize the amount of bad debt that a company will incur due to customers failing to repay their credit purchases.
How to manage debtors effectively
Debtors are a part of any business, but they can be more difficult to manage for small businesses. With the right strategy and tactics, you can make managing debtors much easier.
We will give you an overview of how to effectively manage your debtor’s accounts, making them less stressful and more profitable. These are the tips on how to reduce your risks of not being paid by customers.
- Establish a contract or agreement with your customers that include payment terms
- Send out invoices asap so that customers know when they need to get their payments in. Ensure you create professional and consistent statements and invoices
- Set up payment methods for your customers to pay you as easily as possible – very important
- Keep track of your unpaid invoices. Follow up with all of your late-paying clients, even if it’s just a phone call or email reminder
- Follow up with customers who owe you money if they don’t respond within two weeks of sending the reminder email. Find out why they are not responding and work with them to solve the problem
- Keep track of unpaid sales invoices. Run an aged receivables report on a regular basis to see how much is owed and for how long it has been overdue.
Set up invoice reminders. You want to run your business as efficiently as possible.
One feature that might interest you is that Xero can be set up to send scheduled email reminders for overdue invoices – set them up once and forget them!
You can customise email notifications with frequency that suits your business.
Aged Debtor Reports
What report can be used to manage debtors?
An aged debtor report or aged receivables report allows you to see all unpaid sales invoices. This can be done very easily in the accounting software and shows how long each invoice is overdue as well as its amount owed.
How to you manage bad debts
While reviewing a profit and loss statement, it’s important to understand whether or not the statements are prepared on cash basis (recognising sales when they’ve been paid), or accrual basis (when an invoice is issued regardless of if it has been paid). So, sales may not always show up as having actual money deposited into your bank account.
Many things can go wrong, including customers unable or unwilling to pay you.
The most important thing in dealing with bad debts is not letting them pile up because once they start reaching a certain threshold, it becomes difficult to predict how long it will take before this debt becomes good again.
Follow the above as a guide to minimise bad debt.
To increase the chances of receiving payment on a debt, you should follow up customers with phone calls and written letters asking for payment. Explore the possible payment plans in the recovery process. Moreover, if there are any issues communicating with them over the phone or through writing then, you can take more drastic actions by placing their accounts with a collection agency.
Finally, when weighing the cost of legal action and likelihood of recovering a debt, consider whether or not it is worth taking further steps. It will be costly dealing with lawyers.
If you’re not getting paid on time, it can be hard to stay afloat. Debtors are one of the biggest reasons that small businesses fail. So how do you get your customers to pay faster? You need to set up payment terms and policies that work – this will make sure they know what is expected from their end when making a purchase with you. It’s just as important as getting sales!
Review your operations and seek advice for further improvements so that timely payments becomes less of an issue in the future.