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Get the Money You Already Have

15 April 2014

How much time are you spending (or more, wasting) on chasing up customers who owe you money? If you feel like you are working too hard to get them to pay up, then this video will help you refresh your technique for following up with aged debtors.

If you would like to discuss any of the points covered here, please feel free to request a free call below.

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Prefer to read rather than watch and listen? No problem – here’s everything I said in the video as text:

Hi, this is Shweta and today I’m sharing with you a very simple, but very powerful technique of effectively chasing up aged debtors. I know it is not a very interesting topic but it is a very critical topic because it impacts 2 important things in your business:

  1. Profitability
  2. Cash Flow

What I’ve seen in most businesses is that the whole approach of chasing aged debtors is not very structured, it is very ad hoc, it’s not something that is measured or targeted and, therefore, it is an activity that simply happens and it is not very proactive. Generally speaking, it is a very reactive thing to do.

There is a cash flow pressure so the business owner sits down with the team member in the accounts team and asks, “What’s going on? Show me what’s pending.” And boom boom boom, there is a fire happening and some reactive actions get undertaken. That is not what I am after because being in the business should not give you that stress and should not result in that reactive action.

It should be more proactive. Now chasing aged debtors or controlling your outstanding is a whole subject itself. There are things involved and I am not going to be covering all of that. But I want to cover with you 1 technique that I know is really powerful and will bring you a lot more in control of the situation.

Your Terms of Trade – don’t be someone else’s bank!

Now one quick distinction before I tell you that 1 technique is Terms of Trade – please be very clear as to what are your terms of trade. If you tell me, “Shweta 30 days is the credit time I give to my customers,” at least ask yourself a question – why not 21 days? If it is 21 days, ask yourself a question – why not 14 days? You don’t know what you don’t know and you need to at least ask the questions to see what answers come from there. I know that with most of our clients, we do try to push those credit terms.

I do not want you to be the bank for some other business.

I would much rather that that cash flow sits with you in your business so that you can deploy it in the right direction, rather than having those heartburns. So that is the first thing: please ask yourself this question and determine what is not negotiable beyond this point, where you cannot accept the credit terms to extend any further.

Build Your Outstanding Table

Now, this should be very familiar to you because this is what I know you look at on a weekly or monthly basis.

First, you have total outstanding, then you have a few brackets for days that the money has been outstanding: 0-30, 31-60, 61-90, >90 days.

Now let’s take an example – £100,000 is outstanding in the business:

0-30: 40k     31-60: 30k     61-90: 20k     >90: 10k

So this is the split within these 4 brackets. The first thing that you need to start doing is start measuring what is the current percentage split that you are seeing as far as this outstanding is concerned. So as in this example in the [0-30] bracket, the percentage split is 40%, and the other brackets are: [31-60] 30%, [61-90] 20% and [>90] 10%.

Now please make this distinction for yourself, it is a very important distinction. The 2 buckets towards the end – the 61-90 and the >90-day brackets – they impact the profitability in your business because these are the clients who have not paid you even after 60 days.

The chances of them paying is getting slimmer and slimmer. Let’s face it. That’s the problem.

As far as the first 2 buckets are concerned – your 0-30 and 31-60 brackets – they are your cash flow buckets. In shifting a client, or a set of clients, from 15 days outstanding to 30 days or 40 days makes a huge impact on your cash flow. So these two is your cash flow, while the 61-90 and >90 day brackets are your profitability – both are very, very critical.

Set Your Targets

Now here is your one simple technique: you need to set your targets. I am not interested in reducing your overall outstanding figure (the £100,000 in our example). That is because having more outstanding is a sign of the growth of your business; as you will grow, you will invoice more, your customers will be more and this amount will go up.

I do not want you to set targets in terms of absolute amount; the target that you need to set is in terms of percentage.

So what you need to do, you need to say, for example, my targets for the different brackets will change to:

  • 0-30 will go from 40% to 60%.
  • 31-60 will go from 30% to 33%
  • 61-90 will go from 20% to 5%
  • >90 will go from 10% to 2%

So this will be your ideal scenario, irrespective of the absolute amount because things will shift.

Decide Who To Chase

Now when you see that things are in line – perfect, brilliant, love that situation. However, if things are out of line – instead of 5% for 61-90, you have 20% for example – then you straight away have to take a look at your list of clients.

Please, you are not looking at the clients that owe you small amounts like £10, £100 or £500, because you want a quick impact in the given time and you want to look at the customers who are big in amount.

Sometimes our team members – and even ourselves – we want to put ticks in the box and say, “Hey we have done/we have chased all of these customers!” No. What you want to do is eat the frog – actually chase customers who are holding onto the bigger money for your business.

So that is what you do, you start analysing, going after the big outstanding amounts.

Similarly, you start analysing the 31-60 as well. If it is out of the line, you start analysing and find out which clients have the biggest amounts sitting in this bracket and for how long now they have been outstanding.

If they are in a range of 35 days or something, that is OK, but if they are close to 60 days, your alarm bells should be ringing. You should be acting on it a lot faster, because hopefully, you will be reviewing this whole figure set every week and not every once a month, or once every quarter.

Your Action Point

So your action point from today’s discussion is basically you need to see what is the percentage split that you have in your business right now, as far as your aged debtors are concerned, what is the ideal split that you would like to have and set that target for your accounts team member or whoever is actually responsible for aged debtors.

Make sure you are reviewing those figures every week.

If the figures are out of line, what you do is analyse and focus on the big amounts, which are giving you that skew and let’s make sure that you and your team eat the frogs straight away without any further delay.

So on that note make sure you will take massive actions for massive results and I will be in touch with you soon. Till then – let the action happen in your business.

If you would like to hear more about this please feel free to get in touch below.

Get in touch

We are looking to invest in good businesses.

If you would like to have an obligation free discussion about selling your business, please email shweta@growthidea.co.uk. You can find more about our investment criterion on https://growthidea.co.uk/private-equity.

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