When we start a business and start managing it, the sales may differ from time to time. A part of this fluctuation in sales may be due to few instances where there are a lot of people that need to pay their due money to the organization. People or businesses who owe you or your organization, money are called as debtors.
Efficient management of your debtors will help you get paid faster and prevent bad debts, where the debtor can’t afford to pay back your company. Consistent collection of debtors’ accounts will also help you maintain a regular cash flow.
But when the number of debtors and the amount to be collected is very large it can be difficult to collect money efficiently and at a regular time which can in turn increase sales but will hinder the cash flow of the organisation.
Managing debtors is hence often referred to as credit management and includes:
But if the credit management of an organization is poor, it can often lead to a decrease in sales. If the customer is not able to meet the deadlines for payment the organization sends multiple emails, multiple phone calls in hopes to maintain their regular cash flow. But in these cases, instead of the debtor paying his/her due on time, the customer feels harassed and hence will be more reluctant to do business with the organization the next time which will hinder the sales.
Therefore, it is very important to have an efficient credit management system in an organization. Debt management also includes keeping debtor records – this is a legal tax requirement. There are also laws governing how you are allowed to follow up debts with your customers which gives an organization limited room to act upon while collecting their debt.
Hence the solution to all these conditions regarding debtor management would be to reduce the number of debtors that an organization has. Reducing the number of debtors but increasing the business that a company does with these few regular debtors is a more efficient way to handle and keep a track on the cash flow of an organization.
Some companies in order to make it easier to manage their debtors, try to reduce the bills receivables that a company acquires even though they’re an added asset to the organization.
All in all, as the company keeps a regular track of the customers and debtors that they do business with, in order to increase their sales and to maintain a regular cash flow in the company it is advised to maintain sales without credit. This will allow a company to keep a track on the complete transaction of a debtor instead of the irregularities in payment and withdrawal.