Managing Debt Collection for Maintaining a Strong Cash Flow Position
Whatever is happening in the increase of online business and the growth in cryptocurrency, money is still the lifeblood of any business. Some might see having a large balance on the credit side of the balance sheet as healthy, but a large amount of debt and many debtors impacts the business in terms of cash flow and that reduces the amount of cash available for operations.
Chasing debts costs money. The larger and older the debts are, the more effort involved in getting the money. A large corporation may require a credit control team, while a small business can waste valuable staff resources on managing and chasing debt.
The signs your debt collection process is weak
Debt locked up in unpaid invoices will eventually weaken your cash flow. Sales might be buoyant, and business is growing, but the growing debtors means you might be unable to pay suppliers invoices, restock, or pay staff. The common signs that a company’s debt collection isn’t effective include:
- The debt balance grows every month at a rate greater than payments received.
- The bad debt amount of the debtors’ balance is disproportionately high
- Debt collection is approached with dread. Even hardened credit controllers can struggle with persistent non-payers. Usually, the smaller the company, the less fierce they are about pursuing debts.
- Customer excuses for non-payment are accepted and legal avenues are not pursued.
- Debtors do not respond to phone calls or letters
- There is a large proportion of debt that the business can’t afford to write-off.
Debt Management Improvement In-House
A good accounting system is the heart of debt management. Tightening up the invoice process can greatly assist in more payments received and better and easier debt management.
- Ensure that invoices are timely
- Be clear about payment terms
- Negotiate the best payment terms for each client
- Incentivise early payment with settlement discounts
- Send reminder notices
- Provide numerous payment options
- Automate the invoice process and align it with the business process as much as possible
- Use debt management software
Using external sources to manage debt control to improve cash flow
There are various options to improve debt management in Australia.
The legal route: pursue the debt via the courts. This can be time consuming and is usually best for large debts. The benefit is that it is extremely rare that the court rules in favour of a debtor.
Factoring company: Most factoring companies will provide access to funds within a very short period of time after the invoice is produced. Your business can benefit from funds in as little as 24 hours and the factoring company take on the responsibility of chasing debtors for payment. The downside is that you do not receive the full value of the invoice, with the factoring company taking a percentage of each invoice amount. Effectively, you are selling your debt to the factoring company.
Debt Collection Agency: If you don’t want to lose value by using a factoring company, use a debt collection agency to pursue the oldest and biggest debtors. A good debt collection agency will use the best debt collection techniques to obtain payment. They have the time, the resources, and the skills that your business might not.
Prompt collection of debtors’ accounts helps maintain a healthy cash flow and enable the growth and health of your business.