Save your cash flow by reducing debtor days

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How to save your cash flow

Cash flow is the lifeblood of your business. There are so many profitable businesses that run into the ground because they don’t manage their cash flow properly.

The COVID-19 pandemic has had a big impact on business cash flow in the last two years. According to ABS, 57% of Australian businesses had increased business costs from February to April this year. The ripple effect of this is now 48% of businesses have passed these costs on to customers in an attempt to manage their cash flow.

While increasing your prices will help cover rising business costs and improve your cash flow, it may have a negative impact on customer loyalty, and there are other strategies you can implement instead. One of the simplest and most overlooked ways to improve your cash flow each month is by managing your “debtor days”. Debtor days are how long it takes for your clients to pay you. And it can be a huge killer of cash flow if it’s not managed properly. 

Here’s how you can cut down your debtor days, and increase your cash flow:

1. Review your payment terms

Say goodbye to 30, 60 or 90 day payment terms. Make sure it is clear in your payment terms that you require payment in 7, 10 or 14 business days. 

Make sure you notify your existing clients, and give plenty of notice before their next payment is due so they can adjust accordingly (clients don’t like surprises). 

You may also want to consider offering customers a discount if they pay their invoice within a certain amount of days. It can be as little as a 2% enticement for your customer, but won’t be a huge loss for you.

2. Follow up

Don’t let clients call your bluff and assume they can stretch out payment to whatever suits them. Contact them with a gentle reminder that they have an outstanding bill as soon as it’s overdue and ask them if there is anything that you can do to speed up the process. 

If you’re not comfortable calling and following up on payments, consider hiring a part-time debt collector. They will call on behalf of your business and ask (nicely) for the client to pay their bill. 

Plenty of businesses outsource this to a third party to preserve the positive working relationship they’ve built with their clients. 

You could also use an automated program like Chaser, which sends reminders and follow up emails to clients from your business email address (more on that below).

3. Make it really easy to pay you

Reduce the number of excuses clients can find to delay payment by making it so easy they could do it in their sleep.

Have a direct link to payment on your invoice. Include clear payment instructions. Give plenty of payment options – utilise bank transfer, BPay, accept credit cards and AMEX (with the relevant additional fees). Teach your admin team to walk clients through the steps on the spot if they call up with questions. 

4. No pay = no supply

This applies more to serviced-based businesses, but stop working for clients who don’t pay their bills! 

You should have it clearly stated in your payment terms that if clients don’t pay their bill within a certain amount of time, you will stop supplying your services for them until it’s resolved. 

Don’t keep working for them in good faith. You could end up four months into a big project with no cash to show for it, and then the client could . 

Have a policy in place, and stick to your guns! 

5. Charge interest on late payments

Nothing speeds up the payment process like increasing the amount clients need to pay back.

Just make sure everything is clearly stated in your relevant work agreements and payment terms.

Instead of charging interest, you could also consider a flat “late fee” (although this might not cover your losses as much if the debt stretches out for a long time). 

6. Invest in automated debt collection and accounting software

Manually and individually following up payments is not just a giant waste of your time, it’s also a cash flow killer. If you’re struggling to keep up chasing clients and keep your debtor days to a minimum, it’s time to invest in good, automated accounting and debt collection software to do it for you. You may also want to go mobile and invoice your customers on the spot.

Automating your debt collection process will cut down on administrative time and effort and ensure clients are being followed up to pay their bills quicker. It keeps track of who has and hasn’t paid, and who consistently doesn’t pay on time, so you can more easily implement some of the other strategies listed above and make informed choices about engaging with clients. It formalises the process and removes that awkward personal back and forth that most business owners dread when following up customers for payment.

All this contributes to your business receiving a steady flow of cash to keep the lights on and the wheels turning!

Some great tools that we recommend to our clients include:

  • Cash Flow Story:  It presents your financial data in a digestible way and allows you to track the impact of different changes you could make (e.g. more customers, higher sale price).
  • Use Vend (Point of Sale and Inventory Management) and Xero for seamless recording of sale through to bank reconciliation and GST reporting.
  • Use Deputy for rostering and time tracking.
  • Use Chaser for automatic debtor debt collection and payment reminders.

If you’re consistently having trouble with clients ignoring your payment terms and dragging out your debtor days, you might need an overhaul of your policies and procedures. 

Feel free to get in touch with us about putting together a solid system that works for you. We’ve helped many clients overcome cash flow issues over the years.