Home » Wave » Accounting & Bookkeeping » Don’t get treated like a bank by your debtor- The Art of getting paid on time
Table of Contents
ToggleIn any business, getting paid on time is key to staying afloat. Cash flow is vital for your business to run well. If debtors delay payments, they may treat you like a bank instead of a vendor. To avoid this, you need to manage the debtor cycle correctly. This post will cover key steps to get paid on time, how to handle debtors, and why managing both the debtor cycle and cash flow is essential.
Managing the cash flow cycle is key to tracking accounts payable and accounts receivable, which control the flow of cash in and out of a business. The speed of cash movement shows the health of the business and its profit. Focusing on these parts gives a clear view of the business’s finances. A drop in cash flow can harm a business if not noticed early. Cash shortages happen when costs are higher than sales or when payments are delayed. Late payments from customers can also hurt the flow and cause a ‘less-cash flow’ problem.
Prompt payment laws help small businesses by setting clear rules for on-time payments between suppliers and owners. These rules help cash flow stay steady and fair. Business owners should use tools like payment automation. These tools help keep cash flow steady, making sure the business runs well with fewer resources.
The cash flow cycle is the time it takes for a business to get paid after providing goods or services. This includes:
Buying inventory or services
Selling goods or services
Getting paid
The faster you get paid, the healthier your cash flow. Delays can affect your bills, growth, or paying staff.
There are instances where the business would generate cash; However, it would not be generating a good profit from the operations. It can be vice versa as well-meaning it might generate cash flow, but there might be no profit. Cash flow analysis is a useful tool to track what and how much cash you are spending.
Things you can do to ensure that you have a reliable cash flow and reduce the requirement for a working capital loan
Offer discounts for prompt payments
Ask for a deposit when you take a client’s order.
Issue invoices immediately and set payment expectations from the outset
Automate your invoice reminders to follow up on overdue accounts
Having a good cash flow need not imply that a business has a good profit. To get the profit over the running cash flow, special efforts need to be implemented by the business. This, at the most basic level, includes keeping track of the amount of cash the company spends. This includes employee invoices, inventories, suppliers, overhead expenses, and the amount of income that it receives from its clients. Maintaining a record and keeping an update on the working of the cash flow will help to understand the lagging factor for cash flow to reach the profit margin.
The debtor cycle is part of cash flow. It’s the time between offering credit and getting paid. The shorter your debtor cycle, the better your cash flow. If payments are delayed, this cycle stretches, hurting your business.
Getting paid on time is critical because it:
Keeps Cash Flow Healthy
Timely payments cover your own expenses.
Reduces Stress
Delays can cause financial strain.
Stops Debt From Growing
Unpaid debt becomes harder to collect.
Supports Growth
Steady cash flow makes it easier to invest.
Here are some tips to manage the debtor cycle:
State payment terms in writing.
Include due dates and late fees.
Offer convenient payment methods.
Automate reminders for overdue payments.
Use digital invoices for faster processing.
Provide a clear breakdown of what’s owed.
Send invoices as soon as goods or services are delivered.
Record sales and invoice without delay.
Offer a small discount for early payments, like 2% off if paid within 10 days.
If clients can’t pay upfront, offer them installment options.
Follow up if payments are overdue.
Keep communication polite and professional.
If payment is overdue, consider legal action.
Hire a collections agency or go to small claims court.
Watch out for these common errors:
No Clear Payment Terms: Confusion leads to late payments.
Ignoring Overdue Payments: Delaying follow-ups makes debt harder to collect.
Not Offering Flexible Payment Options: If clients can’t pay in full, give them installment options.
Lack of Communication: Delayed reminders or poor communication can lead to misunderstandings.
Dealing with tough clients? Keep your cool and stay professional:
Don’t get aggressive or rude.
Keep the conversation polite and calm.
Let them choose manageable payment plans.
If the debt is large, consult a lawyer for options.
Monitor your cash flow and debtor cycle regularly. It helps you:
Spot problems before they grow.
Streamline debt collection.
Keep cash flow steady for business growth.
Clear payment terms help ensure smooth business transactions. They set clear expectations and reduce confusion.
Make an agreement that spells out payment expectations, due dates, and late fees. This keeps things clear for both sides.
Always give a clear due date on invoices. Avoid terms like “ASAP.” A set date reduces confusion.
Let clients know the cost of late payments. A fixed late fee or interest charge can encourage timely payment.
Make it easy for clients to pay. Offer bank transfers, credit cards, or online payment systems.
Check that your terms are up to date. Update clients on any changes as your business grows.
Follow-ups help keep your debtor cycle on track. Gentle reminders hold clients accountable and encourage quick payments.
A few days before the due date, send a reminder. This gives clients time to process the payment.
If payment is overdue, reach out right away. A polite reminder increases the chances of quick payment.
Set reminders for overdue invoices. This saves time and keeps cash flow steady.
Be polite and clear in your messages. This helps get better results.
Keep a record of when and how you contact clients. It helps if you need to escalate.
Flexible plans help clients pay on time and can improve cash flow.
Installments
Allow clients to pay in smaller amounts. This makes payments easier.
Multiple Methods
Accept payments by PayPal, credit cards, or bank transfers. It speeds up the process.
Early Payment Discount
Give a small discount for early payments. For example, 2% off if paid in 10 days.
Payment Apps
Apps like PayPal, Stripe, and Zelle make paying faster and simpler.
For reliable clients, consider offering flexible terms. This helps build goodwill and long-term relationships.
Dealing with late payments in a professional way helps keep good relations and aids in debt recovery.
Send a Friendly Reminder
Start with a polite reminder. Let clients know the terms and offer help if needed.
Give Them a Grace Period
Offer extra days if needed. A small grace period may help clients pay without stress.
Provide Payment Options
If clients struggle, offer plans or other ways to pay.
Escalate if Needed
If payment isn’t made, take the next step. A formal letter or call may be required.
Consider Legal Action
If the debt is significant, consider legal action. Small claims court or a collection agency may help recover the amount.
Some clients are tough to get payments from. Here are tips to deal with them effectively.
Set Boundaries Early
Make your payment terms clear from the start. This helps clients know you won’t tolerate late payments.
Be Firm but Fair
If a debtor is always late, be firm. Remind them of the terms and enforce penalties if needed. Stay professional.
Offer Flexible Payment Plans
Allow struggling clients to pay in installments. This can help recover some of the debt.
Use Legal Action as a Last Move
Consult a lawyer or use a collection agency only if necessary. This should be a last step.
Communicate Frequently
Stay in touch. Frequent check-ins can prevent payments from slipping through the cracks.
Technology makes payment processing faster and easier. It can streamline your debtor cycle.
Automate Invoicing
Use QuickBooks or FreshBooks to send invoices automatically. This saves time and avoids missing any.
Set Up Reminders
Set reminders for overdue invoices. Start a few days before the due date.
Use Online Payment Systems
Platforms like PayPal, Stripe, or Square make it easy for clients to pay quickly.
Track Payments in Real Time
Technology allows you to track payments as they come in. You can follow up faster if something is overdue.
Integrate with Accounting Software
Connect your payment system with your accounting software. This helps reduce manual errors and keeps records updated.
At Meru Accounting, we know cash flow and debt are key to your business. We set clear terms, make invoicing easy, and send reminders to get payments on time. Our team stays in touch with clients to keep you in control and avoid late payments. At Meru Accounting, we focus on growth while we keep your finances strong, so you’re not a “bank” for clients.