Working capital is the life blood of business. However good your business strategy is, it is very difficult to make it work without cash to pay the wages and other running costs.
Whilst we often hear about businesses taking longer to pay their creditors in order to increase their working capital, this is obviously a zero sum game; if everyone delays payment the cycle ultimately means that no one gets paid in time.
One often overlooked way to solve your cash flow issues is to improve your Debtor management. Debtor management is a specific business skill in its own right. An often used saying in business is, “A profit is not a profit until you have been paid”!
There are two areas where Debtor management can come into play:
At the front end, when the sale is made and the terms are being set.
The ideal of course is to get the best possible price and to be paid in advance. Good work if you can get it, but unlikely in the extreme. Depending on your own cash flow issues, and the creditworthiness of the client (I am assuming that all credit checks have been made), these payment terms come further up the list of deal making Bargaining Chips (BCs). There is an unending list of valuable BCs, and not all will appeal to every customer. Here are some examples of BCs that are commonly used as aids to getting the best payment terms.
- Price reduction – e.g. 5% discount for payment in 14 days
- Price stability – e.g. prices fixed for 12 months
- Quantity – e.g. 500 unit price for orders of 250 units
- Product or service features – e.g. additional functionality
- Warranty – e.g. 18 months rather than 12 months
- Delivery – e.g. free delivery for orders over £X
- Training – e.g. access to help desk
- Access to literature – e.g. product brochures
- Own label – e.g. service provided in the name of client
- Joint marketing – e.g. joint seminars or joint branded direct mail
After the deal has been agreed.
It is great business practice, whether you have cash flow issues or not, to make sure that whatever credit terms are agreed with a client, they are adhered to. Here are some ways you can do this:
- Make sure the basics on your invoices – address, bank details, invoice amount, etc – are 100% accurate.
- Are any discounts or other terms clearly shown? For example if there is a 5% discount for payment in 30 days rather than 60, make sure the customer knows it!
- Are your invoices going out on time and with the correct documentation? The sooner your customer receives the invoice the sooner you will get paid!
- Don’t give any reason not to pay on time. Build a relationship with the person or people who can help you get paid quicker.
- Make sure your credit control function is fully supported by everyone else in the business.
- Give your credit control team a target to pull in each month, and make sure this fits with your cash flow forecast. If appropriate, pay a bonus based on achievement of this.
Sometimes, simple steps can solve big problems. If you are facing cash flow issues and are thinking about ways to find more money for your business, try some of these debtor management tactics. They just might bring in the cash you need.
Do you have any other top tips for managing debtors? We’d love to hear from you. Please leave your comments below.
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