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It goes without saying that a business needs cash flow to keep operating. If too many customers forget, delay or refuse to pay, your business could end up in serious trouble!
Debt collection is an aspect of cash flow management where a lot of businesses underperform. However, it doesn’t have to be difficult. If you have the right person for the job and develop a workable protocol, the process of debt collection can be made easier and it will have a positive effect on your cash flow.
Employing the right person
Admittedly, the term ‘debt collector’ has a negative connotation. It conjures up images of harassment and fear! Not only that, many business owners might assume that because collecting money comes under the umbrella of finance or accounts, then their bookkeeper should be an expert and enjoy chasing up outstanding bills! That’s not always the case.
The responsibility of collecting money (known as ‘accounts receivable’) is likely to be suited to someone who is good with people – friendly and confident. They should be well-organised, have good time management skills and be able to keep handy records of customers’ habits and tendencies when it comes to paying their bills.
Measuring effectiveness
= Accounts Receivable / Revenue x Time
Generating a report showing outstanding debts broken down into 30, 60 and 90 days columns won’t show the average accounts receivable days, that is, how many days it takes on average for customers to pay their invoices. Businesses operating on payment terms of 30 days may not realise that in reality customers take much longer on average to pay their bills.
Working out the average accounts receivable days provides a useful indicator for your debt collector to measure their effectiveness, and can be calculated using this formula:
For example, a business might have generated revenue of $95,000 for the first quarter of the year. The outstanding invoices, or accounts receivable, on record for that period total $65,000. Therefore, the days in accounts receivable are calculated as follows:
$65,000/$95,000 x 90 days = 62 days
Monitoring this indicator from one quarter to the next, or over a 12 month period, will show whether debt collection efforts are improving, remaining the same or ineffective. These results are helpful both to the person responsible for collecting debts and the business owner.
