Relation Between Cashflow and Debt Recovery
Cashflow is the lifeblood of business. All growing enterprises require access to cashflow to fuel their expansion strategies and your level of cashflow is a key factor in determining whether or not your business is solvent.
The most common issue obstructing good cashflow is poor accounts receivable management. Many businesses fail to recognise that while they are attending to more obvious demands of the business, such as marketing endeavours to secure new clientele their debt collection is falling behind and creating all sorts of cashflow issues.
The reality is, any business that offers services or products on credit, is going to have debt collection issues and may not even know how much it is impacting their bottom line. Businesses do well to regularly examine their debt recovery and collection protocols and procedures to determine whether they are optimising cashflow or not.
Signs to Reorganise Your Debt Recovery System
So how can you tell if your debt recovery systems need an overhaul?
- You don’t have sufficient cashflow to pay your own overheads. If you have to look for somewhere to pull funds from for payroll or other overhead costs, you need to identify why sufficient funds aren’t coming in on a regular basis.You stop trying after 90 days. Making a practice of being soft on debtors, teaches them that they simply need to wait 90 days and they get your goods and services for free. Writing off debt too soon essentially devalues all of the hard work you and your employees are doing. In order to make your efforts worthwhile, you need to be regularly collecting an acceptable percentage of your invoices.
- You stop trying after 90 days. Making a practice of being soft on debtors, teaches them that they simply need to wait 90 days and they get your goods and services for free. Writing off debt too soon essentially devalues all of the hard work you and your employees are doing. In order to make your efforts worthwhile, you need to be regularly collecting an acceptable percentage of your invoices.
- Bad debt write-offs are being factored into new proposals. If your future sales must compensate for previous unpaid ones, it is not sustainable and you are never going to grow your business.
- You don’t know what your DSO (Day Sales Outstanding) is. The day’s sales outstanding analysis provides information about the average number of days that customers take to pay your invoices. It is a key statistic that business owners should be aware of to gauge how their debt collection is going.
- You have to increase credit terms in order to reduce DSO. A high DSO can indicate credit problems or deficient account collection practices. If you are increasing your credit terms to accommodate your clients paying habits in order to reduce this figure, you are probably just disguising your problem.
- You don’t have time to send out bill reminders to customers. They say “the squeaky wheel gets the oil”. So too, regular polite reminders can prompt customers to be forthcoming with payment. If you don’t have time for this, there’s a hole in your bucket and you are losing money as fast as you are trying to make it.
- You don’t call customers until debts are 120 days old. You have the highest chances of collecting a debt before 90 days. If your collections procedures do not involve customer contact regularly at 30 60 and 90 days, you are seriously jeopardising your chances of recovering the money at all.
- You can’t find records of your prior communications with debtors. It is imperative that any communications with debtors regarding payment of their debts, and agreements regarding payment plans or extensions are recorded on their file and followed up on regularly. If this is not done, clients will continue to slip through the cracks or will continue to be harassed for a bill you have agreed for them to pay in instalments.
- Credit collection is not incorporated into your sales. Credit management cannot be viewed as simply an accounting function. The sales team must be informed of appropriate credit limits and inform the client of the credit terms and payment periods at the time of sale. This requires regular communication and a close working relationship between your sales and accounts departments.
- You don’t conduct credit checks on your clients. A good debt collection system starts with determining whether a client can actually pay back the credit that you are extending. This is fundamental to risk management and preventing unnecessary debts.
If any of these signs sound familiar it might be time to invest in developing practices and procedures that will improve your debt collection and cashflow.
Start at the beginning and establish your credit policies. Consult a lawyer if necessary to draft you up a ‘you beaut’ credit application and credit terms to maximise your recovery options. Establish policies and protocols for reminder communications, final notices and the involvement of third-party debt collection or recovery agents.
The time and effort it takes to implement a great debt collection system will be well worth it. A high realisation rate will maximise the value of your time, your efforts and your sales. Your accounts department will also thank you.