Better Debtor Management Tips

By Ram - Jan 19 2024

Debtor management is a crucial part of a successful business. It ensures your business has sufficient working capital to reinvest and grow. This is particularly crucial for businesses that have long invoice waiting times. You need to ensure you can carefully manage your debtors to avoid having too many outstanding invoices that could result in a cash crunch and difficulties in running the business.

Different businesses have different ways of managing debtors. If you haven’t developed an effective formula for maintaining the right balance, these few tips will help you better manage your debtors.

  1. Credit policy and terms of trade

The first step is to ensure you review your credit policies regularly to ensure they match your business’s current credit needs. The credit policy and terms of trade should be appropriate for the business’s risk profile. The policy should be well-written and easily understood by all staff and debtors. Terms of trade should be documented and must cover areas like repayments, down payments, terms and any possible discounts for early payment.

Having such an elaborate credit policy and terms of trade ensures debtors are fully aware of the business’s mode of operation and other stakeholders interested in engaging with the business.

  1. Invoicing and estimates

You should ensure that all your contracts, agreements, purchase orders, estimates, and invoices point to or refer to your terms of trade and credit policy. The invoice should also include the nature of the work or products delivered, quantities, timings and the structure and method of payment. This minimises misunderstandings down the line.

Why not also read: How to Collect Unpaid Invoices

You should also ensure the acceptance of terms is in writing and that the invoice is sent as early and as often as possible. The invoice is a crucial part of the puzzle in managing debtors. As the official mode of communication for the business, having a professional invoice goes a long way in marketing your business and ensuring your debtors have the information they need when making the payments so you can track them.

  1. Accounts receivables process

How you collect payments from debtors or account receivables should be clearly mapped out and understood by the staff. They should also understand the timings for the various communications and how often to make calls, letters and emails. This allows them to remind debtors of the invoices in a regular manner.

If, at some point, the debtor disputes a part of the payment, the non-disputed amount should be sought to maintain cash flow as you work through the disputed amount.

  1. Conduct credit checks for risk mitigation

Credit checks are a vital tool when dealing with new and existing customers. It should be carried out routinely to identify issues that can influence credit limits and the client’s ability to pay. You can monitor ledgers, which have become increasingly available, to identify deterioration in creditworthiness and mitigate risk.

Credit checks are particularly vital for clients seeking large orders and pro-longed paying times. Understanding their creditworthiness should advise whether to proceed with the sale.

  1. Review system and ledger monitoring

You should make it a habit to monitor the ledger and schedule reviews of credit limits. This is critical in ensuring the settings are appropriate for individual debtors.

You should also closely monitor the outstanding days to identify adverse trends in the debtor’s ledger and take prompt action to avoid or minimise losses.

  1. Systems and data management

With all the reviews and credit checks, you will have substantial data to manage. Every good debtor management system relies on well-kept information. It’s about collecting the information and keeping it for reference.

You can choose from the many software solutions available that can help you with credit management. Most of them are cloud-based, which gives you the added benefit of accessing them anywhere. Whatever software option you choose, data integrity should be a priority. You should also double-check that the credit limits are appropriate for every client.

Also, ensure you equip your team with the information on the legal entities to which credit is extended.

  1. Credit management services

Credit checks help to avoid matters getting to this stage. Close monitoring of the debtor ledger minimises payment issues. However, it is common for uncontrollable issues to arise.

The organisation should consider using credit insurance products and debt recovery services to minimise the risks and effects of bad debts.

You should ensure the terms of trade have been reviewed by solicitors and are legally compliant. This will avoid impediments to the recovery process. Some financing, such as invoice factoring or debtor finance, can also be used to provide a comprehensive and efficient credit management function and ensure the business has a healthy cash flow for its operations.

  1. Bad debt provisioning

Credit management is about ensuring your business is profitable. However, you should have provisions for bad debts in any annual and ongoing budget process to minimise the risk of impacting profitability. Ideally, the provision depends on the business’s risk appetite, but this should be closely guarded by ensuring you run regular credit checks to ensure the business engages with low-risk clients.

Closing Remarks

Every business must have a strong and efficient debtor management system for it to remain strong, healthy, and profitable. While your debtor management can prove effective, it’s also vital to note that cash flow can be impacted by another external factor, which makes it unpredictable. Should your business find itself in such dire straits, there are financing options that provide short-term relief quickly and effectively. These include invoice financing and debtor finance. The business can use these products to bridge the cash flow gap between invoicing and payment to ensure you can meet our business obligations.


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