A while ago we looked at managing creditors. This week it is debtors – people that owe you money for your goods or services.
You should minimise debtors because you have already paid for materials, wages and rent to produce goods or services. Reducing your debtors can reduce your overdraft and associated interest charges.
Review the payment terms you offer and make them clear on your invoices. Do you need to offer 30 days or will seven or 14 days be acceptable to some or all of your customers? Some businesses don’t release goods until full payment is received. For large or lengthy jobs, including professional services, some businesses require a deposit or staged payments.
Offering a discount for early payment may be worthwhile if the discount is less than the interest you are paying on your overdraft.
Send invoices promptly. Waiting until end of the month adds up to 30 days on top of your payment terms. Assuming you have an overdraft that costs you 10 percent per annum, a $5,000 invoice which takes 60 days to get paid costs you $82 in interest every two months.
Do credit checks on new customers or ask for references from new customers.
Make sure you review your debtors regularly. Most accounting software packages allow you to produce a list organised by when payment is due. Or sort your invoices by their due date to spot any past their due date. Contact overdue debtors promptly. Be firm but polite because their non-payment may just be an oversight. You may have to reduce the amount of credit you give slow payers and cut off habitual late payers. You’ll need a Terms of Trade Agreement that clearly spells out the details if you want to charge interest or penalty fees for late payments. Get legal advice.
Greg Taylor is deputy CEO and chief financial officer for the Hunter-based Greater Building Society. This blog also appeared in the Newcastle Post on July 25, 2012.