At its most basic form, running a business is essentially about the bottom line: – the profit. Does the sales revenue exceed the costs to achieve said profit? In making a sufficient sales revenue, a business owner can pay off his expenses and thus maintain the business as a going concern.
However, with the introduction of credit as a means of improving business flexibility, a complication now occurs in managing business cash flow. A business owner needs to be able to time the business inflows to match the business’ outflows (expenses). Of course, credit management offers businesses the option of obtaining credit but also means that the business needs to offer its customers sales on credit and therefore their income is delayed; cash flow management is certainly much more important in this situation.
It follows that a business needs to be wary about who it offers credit sales to since bad debts (credit sales that you offer a customer who fails to pay you for the goods/services offered) make it harder for your business to meet its obligations.
Therefore, a business needs tight debt recovery processes (or, a customer screening process).
Efficient Debt Recovery Processes
Screening your customers
The first filter to avoid problematic customers is by screening your customers. Consider this a due diligence conducted on your prospective customers. The purpose here is to establish the creditworthiness of your customers. You can achieve this is a number of ways: you could ask around in the industry about the reputation of your prospective customer or use indicators such as the number of years the company has been conducting business. If the company is publicly listed, then this makes the work a bit easier since you can obtain the company’s credit scores easily as well as utilise financial ratios to establish the same. This can be determined by ratios such as debt ratio or the company’s quick ratio. These are indicators of the company’s ability to pay its short – term liabilities.
Clear payment policy
A second manner through which to improve your debt process is by having clear policies when it comes to payment of debts by your customers. One such policy could be giving limited credit to first – time customers, regardless of apparent financial clout. This could give you time to assess your customer’s creditworthiness. It’s also an opportunity for your customers to take your credit management processes seriously. Another policy would be a clear payment schedule for your customers based on your own company’s financial ratios. A good financial ratio would be the receivables days of your company. This ratio is an indicator of how long your customers take, on average, to pay your debts. Different businesses have different receivables days. Typically, large businesses have longer receivables (because they can afford to have longer deferment with their capital base). A good payment schedule should strive to take, at most, 75% of average receivables days. In addition to this, your company should strive to insist on a deposit from prospective clients before delivering goods or services.
If your courteous efforts are not bearing fruit, then (depending on how crucial the outstanding amount is to your cash flows) you may want to get a debt collection agency involved in the matter. Boston Commercial Services, in particular, specialise in the effective collection and repayments of customer debts.