How to Understand if Trade Debtors Are Damaging Your Business

Simply having numerous customers who owe significant debts does not necessarily equate to a successful business. In fact, it can be detrimental, particularly to the cash flow. Therefore, although offering credit to customers can be beneficial, small business owners should understand the potential negative impact that trade debtors may have on the company's stability.

Here are a few insights you’ll hear in today’s show…

Steps to manage trade debtors:

1st Step - Understand your payment terms - What are payment terms and how it can affect your cash flow?

2nd Step - Send out invoices on time.

3rd Step - Chase late payments

4th Step - Make sure you monitor your accounts receivable - What are Accounts Receivable?

5th Step - Offering discounts for early repayments

6th Step - Setting clear credit limits

7th Step - Invoice Factoring - What is invoice factoring?

8th Step - Build strong relationships with customers

9th Step - Consider offering payment plans

Resources:

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As a small business owner, you know how important cash flow is to the success of your business. You need to have enough money coming in to cover expenses, pay your employees, pay your tax, pay yourself and invest in your business. However, one of the biggest challenges small business owners face can be managing trade debtors. So in today's episode of the Financial and Lifestyle Freedom Podcast, that is exactly what we are going to cover. 

Thank you so much for tuning in to the Financial and Lifestyle Freedom Podcast with me Annette Ferguson. If you're new around here, I am the CEO of Annette and Co, a UK based accounting firm. I'm a chartered accountant, certified Profit First professional and small business growth strategist. We help business owners take home more money from their business for them and their families to enjoy through a mixture of accounting, profitability and tax management strategies.

And in today's episode of the Financial and Lifestyle Freedom Podcast, we are going to speak about 'How to Understand If Trade Debtors Are Damaging Your Business'. Trade Debtors are customers who owe your business money for goods or services that you have provided. Whilst having trade debtors is normal for most businesses, it can become a problem if you have too many outstanding debts. So in today's episode, we're going to speak about how to understand if trade debtors are damaging your business and what you can do to manage them effectively. 

Steps to manage trade debtors

1st Step - Understand your payment terms - What are payment terms and how it can affect your cash flow?

So the first step to manage Trade Debtors is to understand your payment terms. Payment Terms refers to the length of time that you give your customers to pay their invoices. If your payment terms are too long, you may be giving your customers or clients too much time to pay, which can result in delayed payments and cash flow problems. To avoid this, consider shortening your payment terms.

For example, if you're currently giving your customers 60 days to pay, you can shorten to 30 or 15. If you're currently giving them 30 or 15, perhaps even consider 'on invoice' as your payment terms, or getting a deposit or a payment upfront. This will encourage your customers to pay more quickly and improve your cash flow. 

2nd Step - Send out invoices on time.

Now number two, send out invoices on time. It is incredible the number of business owners that do not send out invoices on time, and this is a major factor in managing trade debtors. The longer you wait to send an invoice, the longer it will take for you to get paid. It's not rude to send an invoice. Make sure that you have a system in place to send out invoices as soon as possible after you have provided the goods or services to your customers.

You should also make sure that your invoices are clear and easy to understand including all relevant information such as invoice number, date, payment terms, and a clear description of the goods or services provided to help avoid any confusion or disputes over payments. 

3rd Step - Chase late payments

And number three, chase late payments. Again, it's not rude to do this. If you have customers who are consistently late in paying their invoices, you may need to take action to chase up these late payments. One way to do that is to make sure that you diarize to send reminders, emails or letters to your customers.

These can be polite but should be firm and should be clearly stating the amount owed, the due date and any late payment fees that may apply. If your reminders are not successful, you might need to consider taking legal action to recover the debt. This can be time consuming and expensive and should only be used as a last resort. However, it might be necessary to protect your business in some situations. 

4th Step - Make sure you monitor your accounts receivable - What are Accounts Receivable?

And number four, make sure you monitor your accounts receivable. To effectively manage your trade debtors is important to monitor your accounts receivable on a regular basis. Accounts receivable refers to the amount of money that your customers owe you at any given time. By monitoring this you can identify any trends or issues that might be affecting your cash flow.

For example, if you notice that your accounts receivable are increasing rapidly, this may indicate that your payment terms are too long, or that your customers are just not paying on time. If you notice that a particular customer is consistently late in paying their invoice, you might need to take action to address this issue and move them specifically on to different payment terms. 

5th Step - Offering discounts for early repayments

Number five, offering discounts for early repayments. One way to encourage customers to pay more quickly is to offer discounts for early payment. For example, you could offer a 2% discount for payments made within 15 days of invoice. This will incentivize people to pay you more quickly and can improve your cash flow. However, you should be careful not to offer discounts that are too high as this will negatively impact your profitability. Make sure that any discounts you offer are reasonable and sustainable for your business. 

6th Step - Setting clear credit limits 

And number six, setting clear credit limits. Setting clear credit limits for your customers can help you manage your trade debtors effectively. Credit limits refer to the maximum amount of credit you are willing to extend to each customer. By setting clear credit limits, you can ensure that your customers do not accumulate too much debt that you are left with a large outstanding balance. 

7th Step - Invoice Factoring - What is invoice factoring?

Number seven. Invoice Factoring is a finance option that can help you manage trade debtors more effectively. With invoice factoring, you can sell your outstanding invoices to a third party company, which then pays you a percentage of the invoice amount up front. The factoring company then collects the outstanding debts from your customers on your behalf.

Whilst Invoice Factoring can be more expensive than traditional financial options, for some businesses, in some sectors, it can be useful, but it is not something that we recommend that every business in every sector uses. This is a very specific method and should be used relatively, sparingly because it is expensive. 

8th Step - Build strong relationships with customers

Number eight, building strong relationships with your customers. Building strong relationships will help you manage your trade debtors more effectively. By building trust and rapport with your customers, you're more likely to get paid on time and avoid disputes over payment. You can also use your relationships with customers to encourage them to pay more quickly and to communicate any issues or concerns that may arise. 

9th Step - Consider offering payment plans

And finally number nine considering offering payment plans. If you have customers who are struggling to pay their invoices you might want to consider offering payment plans. Payment plans allow your customers to pay off their debts in installments over a set period of time.

This can help reduce the risk of default and make it easier for your customers to manage their cash flow. However, it's important to be cautious when offering payment plans as they can be risky if not managed properly.  Making sure you have clear terms and conditions for your payment plans and that you have a process in place for managing any missed payments or defaults. 

Recap 

In conclusion, managing Trade Debtors is an essential part of running a successful small business. By understanding your payment terms, sending out invoices on time, chasing late payments, monitoring your accounts receivable, offering discounts for early repayments, you can improve your cash flow and reduce the risk of damage to your business caused by trade debtors.

It's important to remember that managing trade debtors is an ongoing process. You should regularly review your payment terms, invoice processing and collection procedures to ensure they are working effectively. By being proactive and staying on top of your trade debtors you can ensure the long term success of your business. 

Thank you so much for tuning in today to the Financial and Lifestyle Freedom podcast with me, Annette Ferguson. If you've enjoyed today's episode, I asked two things of you. Firstly, do come and subscribe in whichever podcast player you happen to be listening in today. And whilst you're there, please do take the 30 seconds it takes to leave us a review.

Reviews are the way that other incredible business owners also find and benefit from our podcasts and it would mean a huge amount to us if you are able to leave us one. Thank you so much for tuning in. Until next time.

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About the Author

Owner of Annette & Co. - Chartered Accountants & Certified Profit First Professionals. Helping online service-based entrepreneurs find clarity in their numbers, increase wealth and have more money in their pockets.

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