7 ways to reduce debtor days #3 Credit Reduction


Efficient credit control is crucial for a healthy cashflow, enabling you to pay your suppliers, employees and other debts on time. Debtor days are related to the length of time a debt remains unpaid by your customers. The aim should be to collect payment as soon as possible. Most companies will offer credit to their customers, but by reducing the amount of credit and credit terms, the number of debtor days may be reduced to a manageable level:

1. Many companies offer credit terms as a method used to attract customers. Although most clients will pay promptly, you may find that some are unable or even unwilling to pay on time, if at all. Before offering credit, put a credit process in place that governs who you provide credit facilities to and the length of the term. You will also need to consider how you will collect outstanding debts.

2. Be cautious about the amount of credit you extend to customers, especially new ones. Although credit checking is costly, it is worth carrying out a full credit check on your main customers. Start by offering a small amount of credit and then extend payment terms if they pay within the agreed timescale.

3. Ask for payment within 30 days so that you have more control over your business finances. Some customers may request longer payment terms, with some larger companies requesting 60, 90 or even 120 days. This can create problems for a smaller business, especially if the money going out starts to exceed what’s coming in.

4. You could outsource credit control to a professional so that you collect outstanding invoices within an agreed timescale. Outsourcing provides an accounting solution for outstanding credit and will help to reduce debtor days. If you want to know more about improving cashflow, consider using our cashflow improvement calculator so that you can see how credit control and other solutions could impact on your business.

5. Send out a letter welcoming new customers and setting out the agreed credit terms. State that payment of invoices is due within 30 days and that interest will be charged on amounts outstanding after this date. If you have previously offered extended payment terms, write to customers and inform them that 30 days is the maximum length of time for credit.

6. Reduce the amount of credit offered to a manageable amount so that unpaid invoices don’t have as much impact on your cashflow. You could perhaps offer extended credit to established customers, but bear in mind that they too could fall foul of clients not settling their bills.

7. Keeping debtor days to a minimum is largely about only offering a reasonable amount of credit to those clients who are able to pay and do so regularly. Keep credit to a minimum and aim to collect cash on delivery where possible.