The ultimate objective for a company is to expand and increase profits. For many businesses, this means that more cash is required to fund that growth, invest in equipment and a larger workforce, and also fund credit for customers.
If you gain more customers, and they all want credit facilities, you will have to inject more cash into the business to fund that credit. The longer the client takes to pay, the more money you will need to invest, potentially reaching a point where you are experiencing a cash crisis.
What are debtor days?
Debtor days is the number of days it takes for a company to receive payment from its clients. Most companies will have a target for debtor days, which permits credit facilities while receiving payment and preventing any cash flow issues for the company. The average amount of time given to customers to settle their invoices is 30 days. However, reports indicate that many customers take at least 56 days to pay, while others default on payment altogether. If your debtor days number is very high, you are more likely to experience cash flow difficulties.
To achieve a balance between provision of credit to customers and maintaining a positive cash flow, you can take action to control collection procedures. Very often, a company will employ a management accounting service so that a credit control process is put in place.
For many companies, it’s advisable to conduct credit checks on customers who owe a relatively sizable amount. Initially, consider reducing the number of days given to a client to settle their invoice. A period of 14 days is sufficient for most customers, although if you identify customers who regularly pay late, consider withdrawing credit facilities.
Create a credit control system which can identify any late payers and the amount they owe. Check previous payment history so that you can see if this is becoming a cause for concern. Once you have identified those who have missed the payment deadline, contact them by telephone and ask them when they will be able to settle their invoice. Perhaps put a penalty system in place so that clients know they will be charged if they are late making a payment.
Reducing the number of debtor days in this way will help improve your cash flow. If you would like to discuss other ways to improve cash flow, give us a call to arrange an appointment so we can have an informal chat.