Managing Your Debtors
Not all business transactions are cash and carry, so properly managing your debtors is an important skill for any business owner. Debtors, clients and customers who owe you money, become accounts receivable in terms of your books. Keeping track of who owes what and when it’s due can play a big role in financial statements, income reports, and profit and loss projections. While revenues have yet to be realized, the sales have, and should be recorded appropriately. However, debtors are not just accounts in your books, they are your customers too. It takes attention to detail and good business acumen to balance both sides – the customer and the account.
The first rule for managing your debtors is to set policies you can live with in terms of cash flow. Do not offer net 90 terms if you cannot afford to wait 90 days for the customer’s payment. Granted, you must also consider market practices in your area, as these may dictate what customers expect as far as payment terms. However, your business belongs to you, it is up to you to make sure you set policies and terms that allow your business to operate efficiently and profitably.
As for extending credit and managing accounts receivable, most customers will pay their debts. Many will pay their debts on time or early. Unfortunately, some will drag their feet for reasons of either neglect or their own cash flow difficulties. It is tempting when your favorite customer complains of economic woes to offer an extension, however this is not the best way to manage your debtors. While allowing a good customer a little leeway during tough times can be beneficial and promote good will with clients, going too far with payment extensions damages your ability to remain afloat.
As a rule, do not offer extensions on payment terms. This will allow you the positive cash flow you will need so that when a good customer does need a little understanding, you will be in a position to be flexible without hurting yourself. Managing your debtors takes a warm, friendly approach to customer service, but a firm, sensible approach to accounts receivable. In short, set payment terms that work for your cash flow needs, be firm in your expectations of payment, but do not be so inflexible that you create ill will with customers. Balance these three tips, and your accounts receivable records, as well as your financial statements and customer loyalty will remain healthy and profitable.
