We often see clients who have made decent profits on paper, but their bank account doesn’t reflect this. Slow collection of invoices is the main reason for this happening. Collection of debts is often overlooked by business owners, as they have so many other things they have to do, this takes a back seat. They need to complete the next job, so that they can keep the work ticking over. Without cash coming in, the problem just magnifies.
Did you know that according to statistics an invoice is paid on average 26.5 days after the due date? So this means if your payment terms are 7 days, don’t expect your money for 33.5 days. If your terms are 30 days end of month, then you may be waiting up to 86.5 days to receive payment if you complete the work early in and given month.
So what do you need to do to keep on top of your debtors? Firstly, you need to make sure you are using an accounting system that keeps track of who owes you money and you keep the software up to date. If you reconcile your software each quarter, how can you possibly keep track of who owes you money. This is where you debtor days will blow out even more. We are Silver Partners with Xero, and this program is a great tool to assist you with your collections. MYOB, Quickbooks, etc. will also give you the same information, the key is to keep your system up to date.
Once you are tracking the invoice and we know how much is owed, you need to create a checklist of how to collect money from our customers. This checklist should contain steps to be taken on recovery. You can consider sending an email reminder when the debt becomes overdue. If this doesn’t result in payment, then you may look to make a phone call to the customer. When you make the call, you will need to have a script of what you are going to say to them pre-prepared. This means you can tackle any questions they may have. Get a commitment from the customer when you are on the phone to them. After that, you may look to get other collection agencies involved if the debt is not being paid. If it is a recurring customer, you need to be careful how you approach the debt. You also need to be mindful of the costs involved in using the debt collection agency.
I recently came across a free app called “CollectMORE”. On this app you are able to add your debtors and work through the app to give you tips on how to approach the debt, how to personalise the call, send the customer s text reminder and gives you steps to take before debt collectors need to be called. This is a handy tool to guide you through the steps you need to take to collect your debts. There are many tools around to help and this is just one of those.
Article Written by Paul Wineberg
Paul is a member of the Institute of Chartered Accountants
and a Director of South East Accounting.