Imagine having every cent that you're owed by customers sitting in your bank account now. Would that ease the frustration of cash flow constraints and an inability to re-invest WHAT you want to in your business WHEN you want to?
People who owe you money are your debtors (also known as receivables). So what is debt, really? Quite simply, debt is your money—in somebody else's pocket!
Many business owners find the whole issue of dealing with debtors uncomfortable. Let's face it, it can be tricky approaching long standing customers to ask them to pay up.
Too often, the job of collecting debts is handed over to somebody else, or simply isn't done at all.
Cash flow and control of your debtors affects every part of your business. It can have a dramatic impact on your long term profitability too. And it doesn't have to be hard.
The first step is to take a look at the numbers. They always speak louder than words, and in the case of debtors/receivables, they can paint a vivid picture about your business.
First, answer the following:
-
What is the average size in days of your accounts receivables?
-
What do you collect before you start the work compared to after the work has been completed?
-
What is the ratio of your bad debts to accounts paid?
The answers to these questions are your telltale signs. Consider them the Key Performance Indicators of your debtor situation.
Now do the numbers for yourself. If you could reduce the time you have to wait for an account to come in by 10 days, (from 30 days to 20 days) how would this affect your cash flow?
What would happen if you collected 10% more of your fees before you started the work? Or instead of just 20%, try collecting 30% before you start the job.
Or, instead of sending your clients a final bill at the end of the job, you bill them periodically at the end of each completed stage?
What impact would these simple changes have on your bottom line?
Future editions of Dollars and Sense will look at different ways to make collecting what's owed to you FUN!
