Debtor Management is critical to ensuring your business has sufficient working capital to reinvest and grow. We have compiled a quick list of 8 steps to ensuring your cashflow management system is as robust as possible to keep your business healthy and growing.
1. Credit Policy and terms of trade
Credit policies need to be routinely reviewed to ensure they are appropriate for the organisations risk profile. The credit policy should be clearly articulated in writing to all debtors and understood by all staff. Terms of trade should be documented and cover areas such as prepayments, down payments, terms and any discounts for early settlement.
2. Invoicing and estimates
All quotes, estimates, invoices, contracts, agreements, purchase orders, and related documentation should refer to your terms of trade and credit policy, and information on the nature of work/products supplied, quantities, timings and the structure and method of payment should be clearly articulated in order to minimise any misunderstandings. Ensuring that acceptance of terms in writing is recommended. And of course, invoice as early and as often as possible.
3. Accounts receivable processes
The process for collections should be clearly mapped out and understood by staff, with the timings of various communications (letters/emails/phone calls) articulated. In the event of debtor disputes, payment of the non-disputed amount should always be sought to maintain cashflows.
4. Conduct Credit Checks to identify and mitigate risks
Frequent reviews of credit standing for new and existing customers should be carried out to identify issues which can influence credit limits. Consistent ledger monitoring and early alert reports should be available to help identify deterioration in credit-worthiness of customers and mitigate credit risk.
5. Review system and ledger monitoring
Scheduled reviews of credit limits is critical to ensure settings are appropriate for individual debtors. Routinely monitoring the days outstanding (DSO) is critical to identifying adverse trends in the debtors ledger and ensuring prompt action.
6. Systems and data management
Good debtor management relies on well-maintained information. There are numerous software solutions available to assist owners in credit management, and increasingly more of them are cloud-based. Data integrity needs to be maintained to ensure credit limits are appropriate, and the organisation has good knowledge of the legal entities to which credit is extended.
7. Credit Management services
Close monitoring of the debtors ledger is the best way to minimising issues however there will be situations which are uncontrollable. Organisations should consider if the use of credit insurance products and debt recovery services is appropriate to manage the risk and effects of bad debts. Ensuring that terms of trade have been reviewed by qualified and experienced lawyers and that they are legally compliant to ensure there will be no impediments to the recovery process. Some financing solutions such as factoring (also known as debtor finance) can provide a cost-effective and comprehensive credit management function in addition to a flexible line of credit which ensures that the debtor ledger is maintained and sufficient working capital exists to fund the business.
8. Bad debt provisioning
Credit management is about safeguarding profitability and provisions for bad debts should ideally be made in any annual or ongoing budgeting process to minimise the risk of impacting on profitability.
Efficient and effective debtor management is critical to maintaining strong, healthy cash flows but gains from process improvement can be finite in a competitive business environment, and cash flow is impacted by many external factors which make it inherently unpredictable. In such circumstances working capital finance solutions, such as invoice finance and debtor finance may help bridge the cash flow gap between invoicing and payment to ensure wages, tax and creditors are kept up to date.
The author borrows much experience from research by Scottish Pacific and is a Partner at FGC Kenya, an Accounting and Consultancy Service Company located in Nairobi, Kenya.