Perhaps it is not surprising then that the end of 2020 saw more than 460 Australian companies hit the wall and file for bankruptcy. 2021 is already showing an alarming trend as there is an increase in commercial bankruptcies month on month.
Handling your or someone else’s debt can be tricky, and keeping it manageable can often feel a bit like drowning. For any small business, cash flow is essential, and if customers end up having debt then it can cripple the creditor.
Keeping a grip on debt management is vital to small businesses.
What is cash flow and why is it so important?
For businesses to operate smoothly they need to control their cash flow. It is good for your business to have a positive cash flow so that you are in the black, which is also a good indicator that your firm is profitable.
You can think of cash flow as the life-blood of your business. While it is flowing through the company, everyday activities will be more manageable. Once the cash flow stops, problems arise and the company could even fail.
Having good cash flow means that you can pay your suppliers on time, pay salaries, and make smart decisions without the need to get into debt. If you manage your cash flow effectively you will be able to see where you are spending money and this will make it easier to cut costs.
What would affect your cash flow?
Cash flow can be affected by many business factors such as a drop in sales, expansion of your business, servicing business debts, and investing in new machinery or equipment.
Another reason you may have poor cash flow could be because of your customer debts. It is important to have effective debtor management processes to keep cash flowing into the company.
If you extend too much credit to your customers you could end up with serious liquidity problems yourself. Also, if your customers’ debt isn’t managed correctly you may have problems getting paid.
Why would your customers get into debt?
People and businesses get into debt for all manner of reasons, and it is often no real fault of their own. As the saying goes, things happen, and some of those things are included here:
- Expanding too quickly
- Borrowing too much
- A decline in sales
- Product recalls
- Seasonal changes to revenue
- Legal problems
Regardless of how a company gets into debt if someone owes you money you need to find ways to get that cashback.
How can you recover money that is owing to your business?
If someone runs away from debt then it can be difficult to find them and force them to pay. There are strict debt collection guidelines & laws enforced by the Australian Competition and Consumer Commission.
Skip tracers, legal firms, and bailiffs, all have their part to play with debt collection but when it comes to businesses, fortunately, most don’t run away. When it comes to avoiding debt recovery, often the best solution is managing credit and debt in the first place.
There are ways to improve cash flow from customers and there are incentives you can use too.
Speeding up payments from customers
The best way to control debt is to not let it happen in the first place, however, your businesses may extend credit to customers just as suppliers will do to you. To increase the likelihood of a customer paying you quickly you can use the following methods.
Demand payment upfront
One way of making sure that you will get paid is to ask for payment at the time of sales. While this will keep your cash flowing it may not always be the friendliest way to do business, especially if a customer places huge orders.
Use smart credit and debt management software
Companies such as Payt Software can supply solutions that save you time and automate many areas of debt management.
Offer a discount for fast payment
Drop a percentage from the total amount if the invoice is paid within 7 days, or a smaller discount if the invoice is paid before the full 30 days is up.
Send out invoices and reminders
Sometimes people simply forget to pay. A reminder that an invoice is due can very often make all the difference in whether you get paid within 30 days or if you have to chase the debt.
Offer different payment methods
You can make your customer’s life easier by allowing them to pay in different ways. If you can offer online payments then you might find you are paid much quicker.
Why is debt management so important?
When it comes to individuals everyone knows that there are ways of handling debt and that people take extreme measures to get rid of it. Bankruptcy, remortgages, selling homes for cash, and consolidation loans are ways that individuals use to clear bad debt.
With proper debtor management though, businesses can avoid these scenarios. Proper debt management means that invoices are paid faster, you will save time, and debtors get to reduce their outstanding amounts.
When debts accumulate, relationships can be affected. Proper debt management lets relationships continue to be healthy and business transactions can continue. This is where debt management software can come in and assist you and your customer.
How can debt management software help?
It is highly unlikely that your customer wishes to be in debt so it is in your best interest to make it easier for them to pay you. Smart debt management software is designed to integrate with your existing invoice and accounting software to keep track of all lines of credit.
The software can free up your staff’s time by automating many procedures such as communication and payment. Invoices and other forms of communication will be constant, and overdue letters will be sent out automatically. Payments are integrated into the system so debtors can pay you online when they receive an electronic invoice.
One other important area is that payment plans can be set up on the system. Offering a structured payment plan is a very effective way to manage debt and this can help relations between yourself and your debtors.
There are many ways to improve your business with the latest tech and software, and debt management solutions are one of them. By using debt management software you will not only make your own life easier but that of your debtor’s too.
If a business doesn’t take care of debt management in an effective way, then cash flow will become an issue. If you don’t have cash coming into your business you will have difficulty in paying your own suppliers. This can lead to a loss of reputation and a breakdown in relations.
A shortage of cash could even mean that your staff go without pay or receive wages late. The consequences of this can be catastrophic with low morale, slower production, and staff leaving. On the other side of the coin, if you don’t control debt your customer could end up going broke and you will never recover your money.