Why How You Manage Your Trade Debtors Can Make or Break Your Business
It’s a sad fact that more than 60% of small businesses in the United Kingdom fail within the first three years of operation. Even more tragic is the fact that many of these businesses failed not because they had a bad idea to begin with (though some did! ) but because of poor cash management.
These businesses couldn’t deliver on their plans because they didn’t have enough working capital (cash). It’s even more regrettable because, in many cases, it didn’t have to be this way.
Managing your trade debtors more effectively is one of the simplest (and cheapest!) ways to improve your cash flow.
Trade debtors are clients and customers to whom you’ve issued an invoice but have yet to receive payment.
You may believe that it’s fine because all of your clients eventually pay your bills, so you don’t want to change anything you are doing right now(or not doing as the case may be). This is a fairly common story, but bear with us for a moment.
Let’s say you offer 30-day payment terms to your clients. You invoice in arrears (when the job is finished), and your clients pay 60 days after the due date (recent studies show that the average debtor days in the UK is over 50 days). Let’s also imagine that the project took two months to complete.
You’ve effectively given this client a loan with no interest for 150 days or more. Consider that the costs of completing this work were paid months ago with no income to cover them, and you can see why this isn’t the best way to run your company. In fact, it’s a very quick way to run it into the ground.
There are even more downsides to letting late paying trade debtors slide:
- The longer an invoice is outstanding, the more likely it will never be paid.
- Relationships with clients become strained
- The cash flow becomes uncontrollable.
- Capital is being used to provide interest-free loans to trade debtors rather than being re-invested in the business to help it grow.
Fortunately, it does not have to be all doom and gloom because a well-designed trade debtor management procedure is simple to implement and should begin producing results almost immediately. Here’s how.
Introduce Solid Service Agreements
Once your service proposal has been accepted, and you’re enjoying the honeymoon phase of your professional relationship, it’s time to introduce the business equivalent of a pre-nuptial agreement – the services agreement (aka the engagement letter). This should take place before any actual work begins.
This contract should spell out what services your company will provide, to whom they will be provided, the agreed-upon fees, and payment terms, among other things. They establish expectations up front so that neither party is surprised – no one likes surprises.
Explain in your agreement when you expect to send your invoices, whether it’s in advance, as progress invoices, or at the end of the job. The agreement should also state that you reserve the right to charge for work requested that is outside the scope of the original price (for example, you quoted to build their profile in print media but not manage their social media accounts) and that you will not be undertaking any further work if invoices are not paid.
It’s a good idea to walk your client through the agreement because many people are prone to signing documents that have been emailed to them without fully understanding them.
Before the job begins, both parties should sign the agreement and file it away for safekeeping. There are templates for these agreements on the internet, but we recommend having a lawyer draft something simple for you to use as a template for all of your future work.
Send the invoice, and you’ll be paid. It may appear simple, but the truth is that many people have problems with trade debtors simply because they do not send invoices for their work (we see this all the time).
Invoices should be issued on a regular basis throughout the job, and work should be halted if invoices are unpaid and past due. Here are some helpful hints for sending invoices:
- Make sure the invoice is clear and easy to read and understand – who sent it, what was it for, and how much did it cost?
- Include as many payment options as possible so that non-payment because they did not know how to pay is not an excuse.
- Send the invoice to the correct person – find out who the invoices should be sent to before you send them.
- If you send the invoices with other work or documents, they may get misplaced. Always send them separately, and if you want to be extra cautious, try sending them from a different email address (e.g. accounts@). Your project management and/or accounting software should be able to assist you with this.
Dealing With Trade Debtors Who Just Don’t Pay
Unpaid invoices are the bane of any business owner’s existence, and while there is no way to completely avoid them, there are some strategies you can use to reduce the risk of late or non-payment. Here, consistency is key; make sure the procedure you implement for dealing with late paying trade debtors is followed at all times.
Put yourself in your client’s shoes first. Did you spell out exactly what the fees would be and when they’d be due? Have you sent out enough reminders and notices to ensure that the invoice is paid? Do you accept a variety of payment options? Have you followed through on what you said you’d do? Check to make sure the fault isn’t yours before setting the dogs on a client.
Send out reminders. Remembering to send these can be time-consuming, tedious, and risky for client relations because it’s easy to get them wrong, and a client receiving an undeserved overdue payment reminder can be upsetting. Set up a reminder system that actually works, to avoid this.
You’ll need to escalate the issue once an invoice has passed a certain point, so the non-payer understands you’re serious about collecting the money. It’s time to call after a few email reminders. Remember to tread carefully and simply call to see if you’ve made a mistake or if there’s another reason for the unpaid invoice.
If no amount of reminders or phone calls succeeds in getting you paid, it may be time to file a claim with the local court, hire a debt collection agency, or hire a lawyer. Debt collection companies usually simply take over the task of emailing, calling, or mailing the debtor, and they usually have better luck than the owner because trade debtors then understand the gravity of the situation. Lawyers can be very effective, but they are also very expensive; proceed with caution!
All sounds like a lot, or not something you are comfortable dealing with? Managing trade debtors effectively is yet another thing an accountant can take off your hands, and yet another reason to hire one!