Debtor management is a key component of long-term business success. Poor debtor management can quickly lead to major cash flow disruptions with disastrous consequences for struggling small businesses in particular.
Optima Partners offers a suite of client accounting services to help you understand how to manage your debtors.
Why is debtor management important?
It can be easy to neglect managing debtors, particularly for SMEs. This can quickly snowball into serious cash flow disruptions.
Strategies for debtor management
There are several strategies available to businesses seeking to improve their debtor management processes.
Clear terms of trade
Many businesses, particularly newer SMEs, have informal arrangements in place for providing goods and services. This arrangement is likely to lead to disputes and bad debt with few safeguards.
Establishing clear terms of trade is a great way to minimise these risks and protect the business from unnecessary complications. These terms should be clearly articulated to and signed by customers prior to the provision of goods or services. It’s important that staff are also aware of these terms and strictly adhere to them. If you decide to alter these terms of trade, the changes should be clearly communicated and agreed to by existing debtors and customers
Developing terms of trade for a business can be a complex process and is best done with the help of legal professionals.
Our friends at Business Law WA can assist with your commercial legal matters, including drafting terms and conditions tailored to your business. Contact the team of specialised lawyers via BusinessLawWA@cciwa.com or on 08 9365 7746.
Efficient invoicing
For businesses that utilise invoices, it’s crucial that they are distributed efficiently and quickly.
All invoices, estimates and quotes should have a clear due date, while also referring to the terms of trade. These invoices should also contain the correct relevant information such as the amount owed, billing address and account details.
Utilising advanced accounting software like Xero or MYOB can help streamline and automate the invoicing process. Software like these ensure that invoices are sent on time with correct information and minimise the risk of debt.
Frequent reviews and monitoring
Even with advanced software, it is important to regularly update and monitor an accounts receivable system.
Outstanding debits and invoices should be monitored closely, as well as the systems themselves to ensure that they are meeting the needs of the business. Commit to regular reviews to mitigate the risk of cash flow interruptions and bad debt.
Credit limits
Credit limits are an important tool to maintain financial integrity when invoicing or debiting. A credit limit is the amount of outstanding debt allowed to a customer before the provision of goods and services cease.
Credit limits should be enforced if a client is mounting significant debt, has a low chance of repayment and/or has missed payment dates.
Credit limits should be reviewed for each customer to determine a risk profile. Client accounting software can be instrumental in this process.
At Optima Partners, we can help you with your client accounting services and managing your debtors effectively. Contact us today to find the best solution for your business.
