What Is Debtor Management And Why It Is Important

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Debtor Management Software
Photo via Envato Elements

Debtor management involves setting up a system to manage your debtors. Debt management is critical for all businesses that supply goods to customers on credit. It is particularly crucial in the B2B industry, where most companies deliver services in full and sit back waiting for invoices to be cleared.

Why Is Debtor Management Important?

Any business that extends credit to its customers runs the risk of dealing with bad credits. Some clients will always fail to pay on time. Worse still, you may be forced to chase down payments which may introduce additional expenses.

All these issues lead to cash flow problems. And with poor cash flow, business operations can easily collapse. In fact, 82 percent of small businesses fail due to cash flow problems.

A good debtor management system helps you stay on top of all your debtors. It allows you to manage your clients better, ensuring you receive the full amounts owed on time.

A good system also helps you forecast the performance of your business and identify potential cash flow issues long before they happen.

How To Improve Your Debtor Management System

Here are five tips to enhance your debtor management strategy:

1. Make Your Payments Policies Easy To Understand

One of the best strategies to avoid bad credit issues is to ensure your clients understand your payment terms before you start working together. They need to understand the full amount owed, payment methods, due dates, late penalties, etc.

The information should help the client prepare in advance for your invoice. Moreover, it gives you the leverage of initiating policies like late penalty fees since they’re included in the contract.

Therefore, publish your terms in a place where clients can easily access them. The language should also be crystal clear to avoid miscommunication.

2. Provide Various Payment Options

Different clients have different preferred methods of payment. Some love direct bank transfers, while others will want PayPal or even bitcoin. Your goal is to provide as many of these options as possible. 

3. Automate Your System

It’s hard to run a business and manage your debtors at the same time. And that’s why debtor management software is critical. The tool streamlines your debtor management process, ensuring there’s a smooth flow of cash while giving you room to focus on delivering quality services to your clients.

The software automatically sends reminders right from the first invoice until the last. 

4. ncentivize Your Clients With Early-Payment Discounts

Businesses are always looking for a way to maximize their profits. One classic strategy is by reducing operating costs. Most businesses will jump on opportunities that help them get something done at a lower price.

Therefore, providing early-payment discounts can incentivize most of your clients to pay long before the due date as it helps them increase their profit margins. 

You don’t have to offer insane discounts, though. You could, for instance, provide a 5% discount if the client pays within seven days of receiving the invoice. 

5. Consider Adjusting Your Payment Terms

You may be forced to adjust your payment terms based on how well specific clients clear their debts. For example, if you have one customer who’s constantly late on the payments, reducing the term from 30 days to 15 days may be necessary.

The adjustment can push the client to clear their invoices earlier, especially when a late penalty fee is included.

Proper debtor management is critical for the success of your business. Without it, chances of experiencing cash flow issues and even going bankrupt are pretty high. Use the above tips to keep your debtors in check.