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:
#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:
#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.