Business articles for Small Business Entrepreneurs by Amy Chen - Business Coach, Consultant and Mentor

Boost your Cash Flow by Managing Your Debtors More Effectively

Cash flow is the oxygen that allows your business to live and breathe.

In my cash flow finance days, I had no end of customers boasting about their sales for the last month.

BUT, if you fail the collect the cash, then it’s all for nothing.

Without collecting cold hard cash, you can't pay your rent. You can’t do your payroll. You can't pay your suppliers.

So how do you maximise how much cash you have cycling through your business?

One way is by managing your working capital (think debtors, suppliers, and inventory) more efficiently.

Focusing on accounts receivable (or the people who owe you money), here are some things to consider:

1) Your carrying costs

Your carrying costs for outstanding invoices is a simple formula:

Carrying costs= Invoice Amount x Interest Rate / 365 x # of days outstanding

So an invoice for $1,000 outstanding for 100 days will cost you …

$1,000 x 10% / 365 x 100 = $27.40

It may not sound like much but if you’re owed $100,000, it’s costing you $2,740 just for those invoices. Isn’t that money better in your pocket? (*assuming your interest rate is 10% p.a.)

2) What happens when we reduce those days outstanding?

Say you reduced your terms to 50 days: that $1,000 will cost you $13.70 (or $1,370 if you had $100,000 outstanding).

3) The longer something is outstanding, the harder it is to collect ..

Accounts receivable are not always collected in full for many reasons. Sometimes your customer can go out of business or maybe they are unhappy with the service or product.

Whatever the case might be, the longer an invoice goes unpaid, the less likely you’ll get paid in full.

Let’s put this into perspective:

  • On an invoice 3 months old, your chance of collection is 69%

  • On an invoice 6 months old, your chance of collection is 51%

  • On an invoice 12 months old, your chance of collection is 21%

All of that is cash out of YOUR pocket.

4) THEN ADD admin costs

As invoices continue to age they become more cost intensive - think follow-up letters, phone calls, additional record keeping. If the invoice continues to go unpaid, you may then decide to send it over to a collection agency which will create even more administrative costs.

So what can you do as a business owner?

  1. Don’t suddenly change your payment terms as you run the risk of upsetting customers. If you want to reduce terms, do it incrementally and/or they’re an important customer - negotiate with them to see what they can manage.

  2. Have a clear process in place e.g. look at your aging outstanding regularly. Send a reminder 5 days prior to due date, have a calling schedule e.g. first phone call 7 days after due date, letters 10 day after due date AND stick to this process. As we’ve learnt, the longer something is outstanding, the harder it is to recover the money.

  3. Offer incentives for early or upfront payment but do the sums first to make sure the discount is less that your carrying costs.

Amy Chen, business coach, business mentor, business consultant

Even the largest ASX listed companies can struggle to collect their debtors.

But by slightly adjusting your processes and changing the way you manage accounts receivable, you can significantly more efficient and effective with your time.

Not only will reduce your admin costs, it will also:

  • Reduce bad debt and carrying costs.

  • Put more cash in your pocket.

  • Allow you to spend more time growing your business, instead of chasing sales you’ve already made.

Your bottom line will thank you for it

If you have any questions, shoot me a message. If you'd like some help putting changes to reduced your accounts receivable holding costs, book in for a free 15 minute consultation.