Tips For Collecting Overdue Debt

 

It is undoubtedly a fact that a business needs cash to continue its operation. Your customers’ non-payment of debts due to refusal, delay or forgetfulness, may lead you into financial difficulties of your own!

Collection of debt is one of the important elements of cash flow management that is often underachieved by businesses. In contrary, it may not be that tough. If you employ competent individuals and enforce an effective set of rules, debt collection procedures are simple. Moreover, this could positively improve your cash flow.

Hiring the right employee

It cannot be denied that the term ‘debt collector’ already has a negative implication to us. It somewhat implies annoyance or fear. In addition, because the collection of cash is under accounting or finance, many business owners think that bookkeepers are the specialists in chasing customers to pay – this should not always be the case.

The responsibility of collecting money due from customers (also known as accounts receivable) should be with someone who is good with people, someone who is confident and responsive. They should be systematic, time-conscious, and knowledgeable on customers’ payment patterns, habits, and their ability to pay.

Regularly check your accounts receivable to keep cash flowing in.”

Assessing efficiency

Having a report that shows outstanding debts which have aged 30, 60, or 90 days would not actually determine the average accounts receivable days (the number of days it takes before the customers actually pay their debts).

Knowing your average accounts receivable days gives you a helpful hint in measuring your debt collection’s effectiveness. This can be calculated using this formula:

Accounts Receivable / Revenue x Time = Average Accounts Receivable Days

For instance, a business reported revenue of $120,000 in the first quarter of the year. The outstanding accounts receivable for that period totaled $90,000. The days in accounts receivable is as follows:

$90,000 / $120,000 x 90 days = 68 days

By using this formula, you will be able to check regularly and determine whether your debt collection is improving or not. This is essential to both the accounts receivable collector and business owner.

Next Step

Hire the most competent employee for the job or outsource this function to a professional with a good track record of results. Both of you should work on the rules for debt collection and use it in assessing performance.

Set dates in your calendar on when to evaluate outstanding accounts receivable so that you will not forget about it.

 

Email us at hello@youraccountingpartners.com.au or call 07 3668 0646 for all your accounting needs, bookkeeping, tax returns and compliance, business valuation and business sales.  Support and assistance for your small business needs.

James HuyVuong is a CPA and the owner of Your Accounting Partners. Partnering with businesses from start to scale thru to sale.

Posted on 15/03/2017 in Accounting Services

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About the Author

James Huy Vuong the Founder of Your Accounting Partners, a Brisbane based Business support agency. Specialising in providing bookkeeping, accounting, tax and compliance, business valuation and business sales services to local small business owners. His passion for business was evident very early on at the start of his career in accounting. He embarked on an unconventional path away from the traditional position with one of the big 4 accounting firms like most aspiring young graduate in his field. He decided instead through the lure a more diverse role, more pay and a much cooler title to work with Australia largest telco as a Business Specialist. He entered the world of business management and ownership in the hospitality industry for the invaluable hands-on experience one could not get just by reading textbooks, understanding debits and credits and passing exams. Huy has also spent a good part of a decade in the financial services industry owning and managing his family business which has lead him to start Your Accounting Partners. Your Accounting Partners sets out to help time-poor, frustrated business owners do better business by partnering with business owners on their ownership journey and making it together. Your Accounting Partners specialises in hospitality, service-base & professional services businesses. His mission is to help business owners use their business to give back to the family what it takes out. When it comes to business we say "You focus on what you do best, partnering with us and we'll take care of the rest".
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