Last week Dun & Bradstreet published their Trade Payments Analysis Report. This report details the average times that firms take to pay their bills. Their key findings were that private firms were taking half a day longer to pay debts than the same time last year (44.6 days), while listed companies took nearly 6 days longer to pay debts (51 days).
While the increase in debtor payment days may seem relatively insignificant for private firms, even a small increase can have significant implications for the cashflow of your business.
Consider a typical New Zealand “mum and dad” business, with sales of $600,000 + GST. An increase in average debtor days of 0.5 means they’re out-of-pocket (on a cash basis) by around $1,150. Although that may not seem like much, it’s more cash that needs to found by either the company paying its bills more slowly, through a bank overdraft, or by the owner sinking more cash into the business.
Keeping your debtor payment times to a minimum is critical. Monitoring the time is the first step – this provides an objective benchmark for you to hold yourself accountable against. Calculating average times for each customer can also help you weed out your worst customers. Cashflow savings made by no longer working with particular clients may significantly outweigh any reduced profit margins. Other systems and processes (such as external collection agencies, or internal debt collection procedures) can help you control your debtors.
What systems have you got in place to help you control your debtors? If you don’t have anything specific, or simply fly by the seat of your pants, give your Chartered Accountant or iif Chartered Accountants a call.