Your business might generate a considerable amount of profit. But a good majority of that profit could be tied up in receivables, which doesn’t do you much good when it comes to you needing cash to cover your operating expenses.
In this three part series, let’s talk about how you can manage your cash flow even better by focussing on the Assets section of your Balance Sheet:
PART 1 – TRADE AND OTHER RECEIVABLES (Debtors)
Accounts Receivables is one of the largest assets for most businesses. Since it can have a huge effect on cash flow, it is important to manage credit and collections activities efficiently and effectively.
So, how quickly are you converting sales invoices into cash? Your answer should be earlier rather than later. Your debtor days should not be more than the industry norm. If it is, follow these steps for improvement of your cash flow:
1. Incentivize customers to pay sooner
Who doesn’t like paying less for products or services?
Consider offer customers favourable payment terms if they pay their invoices early.
2. Charge late fees
We all know the panic of an overdue library book or movie – and it definitely incentivised us to return them on time.
So, why not apply the same logic to your invoices?
By charging a fee for late payments, you are putting in place a strong motivator. However, make sure that this fee is fully understood by your customers and that it’s clearly visible on the invoice.
3. Send invoices as soon as possible
There’s no merit in waiting.
The sooner an invoice is with your customer, the sooner any agreed credit terms can start running.
4. Make sure your invoice is accurate
Be clear and concise.
Does your invoice clearly state exactly how much is required? Have you addressed how can your clients pay you?
5. Have a credit collection policy
Have a clear credit policy in place that includes:
Running credit checks and avoiding extending credit, especially to customers who is unable to pay
6. Send invoice reminders
Don’t be afraid to send out reminders on regular intervals.
The longer invoices goes unpaid, the less likely it is that they will ever be resolved.
7. Automate your process
Take the pain out of chasing your customers personally by automating the invoicing process.
The next point is more considered a tool rather than a strategy:
When you have debtors on payment terms of 30/60/90 days and cash flow is needed now, consider factoring. This is cash management tool used to sell your assets – commonly your debtors book.
The funding source buys the right to collect on an invoice by agreeing to pay you the invoice’s face value less a discount.
By implementing these 7 debtor management strategies, you can optimise your accounts receivables, decreasing debtor days as a result and have more cash in your business.
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Contact Sharon on firstname.lastname@example.org for help and assistance on your cash flow and other accounting matters