Payment reminders: the data on debtor management

Late payments. Two words that can strangle your cash flow and tie up staff in the unwanted task of working the phones to chase unpaid invoices (phone tag anyone?).

Data backs this up, of course.

ezyCollect is a leading accounts receivable software company, and our research for MYOB indicates businesses can’t escape having to remind customers to pay. *

In fact, 59 percent of overdue invoices require three or more follow ups before they’re settled, so reminders help to recover cash.

But at what cost?

After examining the 213,000 invoices we manage for MYOB EXO clients, we found that 49.6 percent of those invoices typically become overdue, with businesses incurring huge costs.

To summarise, these can be:

• Lost operating capital
• Interest paid on loans to cover cash flow shortfalls
• Labour time chasing overdue customers (as much as 100 hours per month)
• Bad debt write-offs

But here’s the good news. MYOB EXO clients using ezyCollect collect on average around $30,000 a day.

Our software recognises unpaid invoices, and then sends out automated reminders to collect payment.

Here’s what the stats show:

• 21 percent of invoices are paid on first follow up (typically an automated email reminder)
• 20 percent are paid after a second reminder
• 32 percent are paid after the third reminder
• 13 percent are paid on the fourth reminder
• 10 percent are paid on the fifth reminder
• 3 percent are paid on the sixth reminder
• 0.5 percent are paid after a demand letter
• 0.5 percent are collected via professional debt collectors

While there’s no escaping the need to remind customers to pay, it’s possible to ease the burden of communicating with overdue debtors and get your invoices paid sooner.

These essential prompt payment principles can quickly improve cash flow and establish a prompt payments culture.

1. Discipline

Any business issuing trade credit should have a systematic process to track outstanding invoices and debtors so it never loses track of money that’s owing.

This process should include:

• Signed and approved credit application forms before trade credit is issued.
• Invoice tracking that identifies when invoices are overdue, by how long, and how much.
• A communication workflow that is consistently enacted when invoices become overdue. At scheduled intervals, debtors predictably receive reminders to pay, with the aim of shortening debtor days.
• A known process to escalate debt collection to the professionals when needed, so collections don’t stall.

While it’s possible to do debtor management tasks manually, automation allows skilled staff to get on with more valuable jobs that are competing for their time and attention.

In terms of efficiency and reliability, automation leads to discipline and control.

2. Data

Setting some accounts receivable goals is a fantastic way to put the spotlight on cash flow and helps businesses narrow in on getting paid faster.

There are many accounting formulas that help here, but a simple one is Days Sales Outstanding.

Use it to calculate the average collection time in days, then determine what needs to change so debtor days reduce.

Day-to-day, business operators should have the following data at their fingertips:

• Accounts that are most overdue
• Debtors that owe the most money
• Debtors heading into the danger zone of defaulting
• Debtors nearing or exceeding their credit limit

3. Debtor Friendly

Just as a customer-friendly business will reap rewards, so will a debtor-friendly business.

Make it easy for debtors to make a payment.

If a debtor needs to pull out a cheque book or phone in to make a payment by credit card, expect delays.

Debtor friendly businesses:

• Offer several ways to accept payment—online payments provide the ultimate convenience for debtors. ezyCollect data showed that 30 percent of payments are made between 5pm and 10am.
• Send polite reminders—smaller customers often rely on their supplier’s reminder system.
• Respond quickly and fairly to invoice disputes.
• Reward prompt payments.

Cracking the debtor management code is easier than you think. Unlocking the cash also frees you up to unlock your potential.

What could your business achieve with more time and cash?

*MYOB EXO clients using ezyCollect for automated credit management.