Debtor management 101

By Frans van Eden

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Small businesses often feel that they need to be more lenient to attract and keep the business of larger companies. One of the areas where many entrepreneurs compromise is on debtor management, simply because they feel they will chase customers away if they harass them for payment or because they dread the idea of calling a customer to chase money.

Recent studies by SAICA (South African Institute of Chartered Accountants) have placed debtors as one of the major concerns for SMEs and when left too long it also one of the leading causes for bankruptcy in SMEs. The reality is that debtor management is the most important focus area of your business – as important as sales.

What is the point of selling to a customer when they don’t not pay you in time, and in some cases never pay you?  You incur costs associated with that sale such as employee salaries, cost of goods sold (COGS), interest where you purchased inventory on finance, VAT that you need to pay SARS, etc. Simply put, if you do not have a sure-fire way of collecting on that which is owed to you, you should not sell on credit in the first place.

Principles of debtor management

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■ Verify a customer and their credit record before you sell to them: It is extremely important to know who you sell to. Therefore, ask potential credit customers to complete a customer details form, credit check authorisation form, terms and conditions of sale and personal security form. You would then be able to determine how credit worthy a customer is and offer them a credit facility that they can afford. Should you ever need to hand a debtor to an attorney for collection these documents will prove vital in ensuring the best chance for success.

■ Include a line on your invoices that state that all goods remain your property until fully paid-up and that you reserve the right to take any goods back into your custody should a customer fail to pay within the payment terms agreed to.

■ Always require a deposit: Never sell to a customer where no deposit has been received. As a rule of thumb, the deposit should at least cover the COGS, but I believe it should also include a portion of gross profit to cover the overheads associated with the sale.

■ Use payment reminders: Modern accounting systems such as Xero and Quickbooks can setup auto reminders to customers. They are extremely flexible. In my practice I have my system setup to send a reminder on the day when an invoice is due, and everyday thereafter for the next 7 days. A bit much? I don’t think so as it saves the time to call a customer to remind them that their invoice is overdue, and it saves a customer the embarrassment of receiving a phone call that reminds them that they owe money.

■ Follow-up quickly: If a customer does not pay within the 7-day grace period, call them immediately on day 8 to remind them of the payment that is due. Request a date on which payment can be expected and explain why it is important for them to pay on time.

■ Use warnings: If it has happened once or twice that a customer exceeds their payment terms, arrange a meeting with the client and then give them a friendly warning that you will revoke their credit limits should it happen again. Usually this causes customers to stick to the payment terms in future but otherwise follow through on your warning and do not release work completed before payment of the invoice. In cases where you sell goods you would require proof of payment before releasing a shipment of goods.

■ Do not deliver any more goods or services to customers who have outstanding accounts.

■ Make use of an attorney: Lastly, should a customer exceed payment terms by 60 days and you have recorded all your attempts to collect on payment then it is time to hand them over for collection by an attorney. There are costs involved with this, but it is very important to collect as much of the debt as possible as you need to recover the COGS and related overheads otherwise your business will make losses which will lead to bankruptcy.

■ Always charge interest on debtor accounts as this will motivate them to pay as quickly as possible.

Debtor management is one part of your responsibility to manage your business’ cash turnover cycle. Your goal is to reduce the amount of time it takes to collect money from your debtors. One of the simplest methods of achieving this is to provide customers with easy ways to pay, such as credit card facilities or offering discount on early settlement.

As this is the most important area in your business you shouldn’t shrug off all responsibility and simply delegate it to your employees. Remember your employees receive a salary from you and in many cases, they do not gain when all debtors are paid up to date.

As business owner you only realise your profits only after all outstanding balances have been collected. So, you can’t go and buy the car and home of your dreams if people owe your business money. Please be frank with yourself and admit that the reason you started your business is to provide a better life for yourself and your family, and that can only happen when you have cash in your pocket.

Being a responsible owner means making the difficult decisions and doing the most difficult tasks, and following up with debtors is one of those tasks.

Customers will respect you for doing it and you will have surety that only your best customers have credit facilities available to them.

This article first appeared in the Feb/March issue of Your Business Magazine. Read the rest of the issue here.


Frans van Eden, AGA (SA) is MD of Prioritse, specialising in tax planning, insurance, financial advice, accounting and corporate structuring. Email frans@prioritise.co.za to arrange a free consultation. Visit: www.prioritise.co.za


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