How to reduce debtor days

Delayed payments and poor cash flow are a cause of stress for many businesses, with 69% of business owners admitting to having lost sleep due to cash flow worries.

These worries are not unfounded either – 43% of small businesses have been at risk of not being able to pay employees on time, with 32% of affected businesses paying employees late (Forbes, 2019).

 To reduce debtor days and effectively manage cash flow, a methodical, consistent and professional approach is key. In this guide, we share how to build a system to effectively manage customer and supplier payments.

Start with clarity

The easiest transactions are made when payment terms and methods are laid out clearly and communicated with all parties upfront. A simple way of ensuring this is by producing a standardized document that can be sent before requesting payment, this can be inserted within terms of business or to accompany an invoice. The document can also be shared internally as a point of reference so that there are no miscommunications between the customer and their account handler.

This document will mean that customers can make payment of future invoices immediately if they want to without having to request further information, and understand the consequences if payment is not made on time. Details to include are types of payment accepted, days to pay, the interest charged if payment is not met and contact details in case there are issues with payment.

Set reminders

Your customer is likely to also have many customers and suppliers of their own, some of which will also be chasing, or even delaying payment. To become a priority and avoid being forgotten, friendly and instructive reminders can be used.

For example, setting automated reminders one week and two days before payment is due can help prevent less desirable conversations later on and ensure that the customer has all the relevant information they need to pay, even if they missed the first invoice being sent. To keep absolute transparency, these reminders should have your branding so that they are instantly recognizable, the original invoice(s) attached as well as the standardized document that explains methods and terms of payment.

An added benefit to this method is that you will receive automated out of office replies if the recipient is away so that you will know to contact the main office if they are not due back before payment is needed. If there are later issues with payment, you will already have the knowledge and proof that the relevant party had the tools needed to pay.

When payment is overdue

There are some customers that despite having all the tools and goodwill in the world, simply fail to pay on time. It is often at this point that tensions can arise, dampening the efforts originally put into building a solid customer relationship.

When a telephone call is necessary to chase payment up, it may be best made by a member of the team who has an existing relationship with the customer, instead of between finance teams who have not been introduced previously. The finance team can provide support in this scenario instead with clear documentation.

Adding watermarks to an invoice is a quick and easy way of labeling it as overdue and immediately obvious to the customer when opening. Simple phrases such as “due”, “past due” or “final demand” in grey or red text will add to the sense of urgency that payment is expected.    

In the case that several invoices are outstanding, these should be sent together within the same email as separate attachments, with their watermarks so the customer can prioritize when paying and stay on track of what they owe.    

Keeping track

Whilst you have been putting steps in place to secure payment from customers, your suppliers will be awaiting payment from you. Routinely setting reminders, grouping and creating personalized invoices based on the date due is time-consuming if done manually, and can leave you with little time to manage your payments.

To maintain consistency and save time, set company policies around invoicing procedures and use a system that enforces and automates these processes. A good document management system or accounts payable software package will allow you to send out batches of emails and invoices, apply watermarks and your branding to invoices as well as consolidate multiple emails so that you can continuously keep and share a record of outstanding invoices without confusing or aggravating your customers.

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