How important is it to effectively manage debtors?

Healthy cash flow is reliant on the successful management of debtors.

Any business will live and die by the amount of capital flowing in and out of it. If a few sources of income dry up unexpectedly, then issues can quickly present themselves. While big corporations may be able to sustain themselves at a loss for varying lengths of time, small and medium-sized enterprise (SME) owners simply don't have the luxury.

ANZ highlighted that a golden rule for businesses is to collect money owed faster than capital is paid to others. Moreover, the inability or unwillingness to actively pursue those that owe money can hurt the company.

Small business accounting may seem like a complex subject at times, but having a strong plan in place to claim any owed funds is one of the fundamental steps in ensuring figures stay in the black.

Managing debtors can be much easier once there's a strategy in place.

Have a plan

It can be difficult to hound customers for money, particularly if you've only just started your own small business. However, shying away from the issue will only allow cashflow challenges to develop.

The solution? Have a plan. Research by UK-based finance specialists Loucas explained that debt collecting doesn't have to be laborious providing there's a strategy in place to deal with it. This can be as simple as consistently sending reminders. 

For example, you could contact customers two weeks after a payment was due and continue to send reminders every two weeks thereafter. These can be tactful and have the potential to remove some of the unpleasantness you may associate with debt collection.

Being unwilling to pursue debtors can actively impact the health of any business.Being unwilling to pursue debtors can actively impact the health of any business.

Necessary escalation

There are times when being a little forceful may be what's required to ensure the business receives the capital owed. While some of the conversations may not be pleasant, you simply cannot put politeness ahead of the health of your business. 

The Institute of Chartered Accountants in England and Wales (ICAEW) explained that escalation can occasionally be the only answer. At an individual level, this could include pursuing legal action. For business-to-business transactions, consider presenting the issue to the senior management of the company in question.

There are things businesses can do to help avoid outstanding debts. Specifically, the incentive of a discount in the face of an early payment can spur many into action. While it's not a foolproof solution, it has the potential to also increase repeat business.

Ultimately, there are no hard and fast rules when it comes to chasing debts. However, Loucas pointed out that its key to remember that it's your money, and it may be worth pursuing advice if necessary. After all, capital is the lifeblood of any business. If one or two sources are restricted, even temporarily, then the health of the enterprise could soon start to suffer.

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