How a debt detox could help your small to medium business in the new financial year

cash flow

Many SMB owners think that that debt management is frustrating, repetitive and even awkward, but it doesn’t have to be. When approached with professionalism and a clear plan of attack, the right debt strategy could save weeks’ worth of work per year, while also doubling or tripling working capital.

So, why isn’t everyone doing a debt detox? Business owners often blame cash flow problems on sales, inventory, pricing, competitors, the economy, without realising that the real issue lies in credit control and debt management.

Does your business need a debt detox?
  • Your business takes too long to collect its account receivables and days sales outstanding is growing
  • Your staff spend too much time chasing unpaid invoices
  • The stress of overdue debt is keeping you up at night
  • Your customer relationships are strained by late payment problems
  • You don’t know where to begin to fix your overdue debt problem

Dealing with debtors can seem overwhelming, but a deep clean of your debtor management problem isn’t as hard as you may think. If your business has any of the above symptoms, use the new financial year to evaluate and restructure your debt processes.

Here are 10 steps you can start today:
  1. Recognise the problem: Reducing overdue debt and improving average collections by even a week can inject much-needed operating capital into a business. Increasing sales is great, but until you get paid, nothing improves.
  2. Flush out your biggest debtors: Map your accounts receivables so you get a clear picture of the percentage of invoices that are overdue, by how long, and how much is owing to your business. Identify your largest and longest overdue accounts, they are your starting point.
  3. Appoint a debt collection agency: A debt collection agency is not just an endpoint. Start by sending through your largest and most overdue debts; having experts deal with these will help your business recover its most significant returns efficiently.
  4. Set accounts receivables goals: There is a lot of measurable data you can mine from your balance sheet and profit and loss statement alone. Ask your accountant to do some modelling on basic data like your Days Sales Outstanding and Accounts Receivable Turnover Ratio. Find out the impact on cash flow if these improve and set some measurable goals.
  5. Update your customer details: Chasing a payment is almost impossible if you don’t know who to contact. Start with your oldest debtors, as the longer a debt ages, the less chance there is of collection. While you’re updating your records, note the last known action taken to chase payment (e.g. phone call to MD with promise to pay mid-February).
  6. Refresh your credit policy: Your credit policy may no longer reflect the needs of your business or how you want to allocate credit to customers and manage debtors. Update your policy to make sure it achieves the aims of (1) getting paid promptly and (2) maintaining a great relationship with your customers.
  7. Send a bulk email to overdue credit customers: Use the opportunity of the new financial year to genuinely reach out to your customers and wish them success. Let them know of any updates to your credit policy and any follow-up action they should expect e.g. ‘Sam from accounts will be in touch to discuss your payments plan.’ Emails like this serve as reminders and often prompt action.
  8. Enact a predetermined communications plan: Every credit customer should have a customised communications plan that is triggered on day 1 of an invoice being overdue. Now that you have updated your customer contact details, choose the channels you will use for reminders (e.g. email, SMS, call) and document the escalating plan of action.
  9. Install an online payment gateway: Your reminders are going out as per your communications plan—now make it easy for debtors to pay you. If your customer can’t easily transact with you online, expect more delays.
  10. Tighten your controls on credit customers: You’ve put the time and effort in to clean up your overdue debts, now don’t let them get out of control again. Risk management strategies such as getting credit reports before offering trade terms to new customers and monitoring your customers’ credit activities are long-term investments in protecting your cash flow and peace of mind.

About the author

Arjun (AJ) Singh is the co-founder and managing director of ezyCollect, a Sydney-based startup that provides accounts receivable software to small- and medium-sized businesses. ezyCollect is currently being used by more than 500 businesses in 24 countries.