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Could your business be heading for a cash flow crises because you're not managing your debtors efficiently?

by , 08 July 2013
Everyone knows cash is king in any business. That's why you need to know how to manage your debtors to avoid a cash flow crisis. Here are three tips you can use to manage your debtors and get your money quicker.

Working capital is made up of debtors, creditors and inventory (stock). It's the money you use to make goods and generate sales. The less working capital you use to generate sales, the higher your return on investment (ROI) will be, the Practical Accountancy Loose Leaf explains.

And since debtors owe your company money, ideally you want them to pay you as fast as possible, preferably in less than a year. This'll help you improve your company's cash flow.

This is where good debtor management becomes an essential component in helping you create sustainable profits when your debtors to pay the right amount, on time.

Use these three tips manage your debtors and steer clear of a cash flow crisis

#1: Collect your debts IMMEDIATELY. Your administrative and other debt collection costs mustn't be more than the money you recover. If you spend extra money on debt collection, you'll reduce:

  • Bad debt losses;
  • The average collection period; and
  • Interest payable on overdrafts.

#2: Manage your paperwork meticulously. Deal with sales paperwork promptly and accurately. If you don't, mistakes can creep in. And this could cost you a lot of money.

Do the following to manage your paperwork efficiently:

  • Send out invoices immediately after delivery, if possible with the delivery.
  • Check that invoices are accurate. Remember, if you don't do this, disputes can arise and delay money from being collected.
  • Investigate queries, complaints and credits notes swiftly.
  • Issue monthly statements early to avoid a delay of payments.
  • Use the age analysis function in your accounting package to follow up long outstanding debtors.

#3: Use early payment discounts. If you give the debtor a bigger discount for paying his debt early, it's more likely he'll pay that debt. After all, who can resist a discount?

But how will you know if offering a discount for early payment is financially worthwhile?

You can 'compare the cost of the discount with the benefit of a reduced investment in debtors,' the Practical Accountancy Loose Leaf advises.

Using these tips will help your company manage debtors efficiently. What's more, you'll get your money quicker and make sustainable profits.

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