5 Ways To Improve Cash Flow Through Debtors Management

INTRODUCTION:

In order to survive a business needs to maintain cash flow as it is the liquid gold that flows through its veins. Any small business accountant should be able to look at a balance sheet and profit and loss statement and quickly ascertain whether the business is doing this well, average or poorly.

Here are 5 quick tips to help you to improve your cash position.

Figure 1: Follow these simple tips to improve your cash flow!

1. Establish your cash flow performance

To measure whether you are improving or not in this area requires a couple of simple steps which can then be the source of your key performance indicators moving forward.

Firstly work out the average days it takes to collect your invoices for sales you have made. This is generally known as Debtor Days.

Look at your year end accounts just gone and calculate Debtors/Sales x 365.

If your trading terms are 15 days from the date of the invoice and the result calculated is higher than this amount then there may be some problems which require further investigation. Remember that this is a rough rule of thumb. If a large number of invoices are raised right at the end of the year for whatever reason, this could make the calculation seem worse than it really is.

Also print off an aged receivables listing from your accounting system. Review percentages of the total amount owed in the 30, 60,90+ columns. See if this makes sense with your calculation above.

On the other side, if some of your business is cash only, it maybe a good idea to exclude cash sales from your calculation as it may be hiding the true status of the average days to collect making you believe that your debtors are paying more promptly than they really are. A business that sells products in retail and wholesale (food distributors and grocery store) might be an example where you would do this calculation.

2. Employ the right person

To collect outstanding monies is not a pleasant job. Whilst it needs to be done politely, you need a firm person to contact those that are slow and ask them to pay as soon as possible.

The person needs to be disciplined, relentless and advise the debtor to nominate a time of when the monies will be cleared so that they can be followed up either before or after this date.

Figure 2: Every small business needs to collect cash quickly particularly if you hold stock. Photo courtesy of Lara Scolari Gallery Balmain

3. make it easy for people to pay you

Most businesses these days will accept EFT and put their bank account details on the invoice. Many will also use merchant systems such as EFTPOS so that debit and credit cards can be accepted.

Businesses that do not offer merchant systems and accept cash only will not only miss out on sales but also become a target of the tax office who is doing audits of these types of businesses.

4. Check your invoice timing

When the goods or services are delivered, ensure that the invoice is delivered promptly and efficiently. Most invoicing systems these days can generate invoices from smart phones and tablets and then emailed on the spot. Many tradespeople have embraced this technology so that they are now getting paid much more quickly.

Cloud accounting systems such as Xero are low cost and make this process very simple.

Performing a job on say the first of the month and then sending the invoice out weeks later and then to make it worse offering terms is an absolute no-no in this day and age.

5. Check credit controls

What systems do you have before offering new customers credit? Do your homework through credit data companies and/or ask for trade references or even insist on cash on delivery until you establish a solid relationship with them.

Figure 3: You may need to employ someone with bite to collect your monies. Photo courtesy of Balmain Baz & Lara Scolari Gallery Balmain

CONCLUSION:

In order to improve your cash flow follow the above tips and speak to your small business accountants. Once you know how you collect your debt, implement change and redo your 3 way budget whilst updating your business plan to make sure you will have enough cash to fund your growth or make alternative arrangements.

Your business's life depends on it!