Debtor Management

JOHN PITITTO, Mead Partners, Chartered Accountants reports on Debtor Management as per his presentation at the September 2013 CMPA Business Seminar 2.

Chasing up debtors is a particular management problem for many businesses – people just don’t like making the calls to chase money, especially if they have a good ongoing relationship with the customer. Unfortunately you can no longer take it for granted that people will pay.

On the other side of the fence creditors are becoming more demanding and COD accounts are becoming a lot more prevalent. Maintaining credit terms is essential for cash flow management as it is ensuring that you have the ability to collect the debtor’s funds in time to pay your suppliers.

Debtors:

• Constantly monitor the debtors ledger for slow payers
• Chase up overdue accounts and follow up on customers’ promised actions (if they say they’ll pay in a week, check that they have actually paid in a week)
• When chasing slow payers, make sure you get a firm commitment date for payment, even if the payment is in two or three installments
• Don’t feel bad about chasing customers for payments, you have provided a service and now they must provide payment

Stop a Bad Debt before it is too late.

In these times it is important to stay on top of the customers that you extend credit terms to so you aren’t taken advantage of. Ensure that you have up to date credit checks on all customers as these are essential to ensure that bad customers have their credit terms reduced or suspended before it is too late.

In addition to this, make sure you look out for some of the warning signs of an approaching bad debt:

• Your calls are not being returned
• Promises to pay not being honored or payments being returned
• Excuses and complaints regarding supplies that appear to have no basis
• Receiving credit reference calls from competitors while the customer still has money owing

Reliance on particular customers

It’s great to win a big contract, but too often businesses devote too much time and energy to servicing that customer that they fail to develop new business. Don’t fall into the trap of relying on one or two major customers, the impact of losing a major customer can be devastating overnight.

A good spread of customer size is the aim, to ensure that if the unfortunate happens then the impact on your cash flow is minimised.

Manage Statutory Payments

When cash flow is tight, statutory payments (BAS, Superannuation, Income tax etc.) are the ones that usually get left to last. While the ATO does not look favourably upon missed and late payments they do understand that sometimes cash is short.

To cater to this, the ATO offers fairly flexible payment terms on the BASs and Income tax so long as future BASs/tax returns are lodged and paid on time (i.e., you can only have one BAS/tax return on arrangement at a time).

However, directors are personally liable for most statutory payments and government penalties are significant when it comes to unpaid super and tax so it is important to make sure that statutory payments are kept under control.

Please also be aware that collection agencies are now operating on behalf of the ATO and there is a significant increase in audit activity for unpaid superannuation.

Excess Plant & Equipment
Do you have plant idle and can it be turned into cash quickly? A quick way of freeing up some cash flow when times are tough is reviewing your asset registers and selling excess plant and equipment.

Not only will you receive the cash from the sale, if the equipment is under finance you will also save the monthly repayments going forward. Some things to consider when selling plant and equipment are:

• Is the asset under finance? If so, the financier will have to be paid out so check with your accountant how much is owed otherwise you might end up having to pay the financier more than what the asset was sold for!
• Will you make a profit on the sale? While in the short term a sale of equipment will generate cash, don’t forget that in the longer term tax will have to be paid on any profit on that sale.
• Will you need the equipment later on? While an asset may be underutilized now, there is no use selling it if you’re tendering for a new customer and will need it again in 6 months’ time. Perhaps it can be rented out in the short term.

Good Management

Good management is the key to survive in the bad times and will make your business even stronger in the good times. Sometimes this means making decisions that you would rather not make such as letting staff members go, and sometimes it means listening to advice or news that you would rather not hear.

In the long run these things are necessary in order to keep the business going and if these decisions are made and advice listened to, the good times will greatly outweigh the bad.

Surround yourself with the best people that you can find, whether it be your accountant, bookkeeper or business manager and make sure that they are providing you with the information that you require to ensure that you can make sound business decisions in a timely manner.

For further information, contact:
JOHN PITITTO
Phone: (03) 9523 2277
Email: john@meadpartners.com.au

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