How To Reduce Debtor Days And Improve Cash Flow

Reduce your debtor days and improve your cash flow!

Cash flow is king in any business. Yet cash flow is one of the areas your business might be struggling to manage. 

Your customers might be reluctant to part with their money, even if it’s to pay for your goods or services. As such, it can take a while for them to pay their invoices. While longer debtor days might not be a big issue for huge international corporations, for the rest of us, it can be a very real source of stress. You need your customers to pay you as quickly as possible so you can continue to run your business, so it’s easy to find yourself working extra hours, chasing up late-paying clients. Here are a few tips to help you reduce your debtor’s days.  

When it comes to cash flow: be clear and concise

When creating an invoice, think about your messaging. Is the due date easy to see on the page? Does your invoice state exactly how much payment is required? And have you clearly outlined the various payment options you accept (such as bank transfers, cash, cheque, etc.)? You should clearly set out options such as “pay now”, “pay by instalments” or “pay on the due date”. 

Offer incentives to improve your cash flow

Sometimes offering a small discount can motivate your clients to pay you on time. Offering say, 5% off the total bill for clients who pay within 2 weeks of the invoice date, can help your business to get cash in quicker. If you set this type of incentive out at the beginning of your client relationship, it will go down well with clients, as they will see the early payment discount as a “value add”.  

More cash flow for you: charge fees for late payment

You can incentivise customers to pay you on time by charging a fee for late payments. If you communicate the terms and conditions around late fees clearly, clients will not be surprised if they are charged for late payment.  If you are going to charge clients for late payment, it is usually effective to give some sort of warning. It may be helpful to send clients an email saying that “payment is due in 10 days time, and if it isn’t received, a late payment fee will be applied.” This gives your client an opportunity to respond. 

Stay on top of your cash flow and embrace technology

There are a vast array of systems available to help your business track invoices, monitor payments and manage clients who have missed payment deadlines. With an automated accounts receivable system, you can keep track of the status of each invoice, who has paid and what is outstanding. You can set up automatic reminders at crucial moments in the payment cycle, and significantly reduce your administration time.

By implementing the above strategies, you can reduce debtor days in your business and ensure that you are getting cash in as quickly as possible. 

Lotuswise Chartered Accountants and Business Consultants can help you and your business succeed. To find out how, please contact us. To also get even more useful business and finance information and tax advice tips, check out our app on Google or Apple stores.