The Nature of Trade Debtors
What actually is the nature of Trade Debtors?
We know from our previous article that Trade Debtors are customers who owe our business money. That means if you are VAT registered in your business, that the value of Trade Debtors in the Balance sheet includes VAT. So because this is an amount of money that is owed to your business, it falls into the group called Current Assets. And that is the nature of trade debtors - it is a current asset in your business and it represents cash due to be collected.
Our first challenge
That leads us to our first challenge as business owners - to get paid for what we do for our customers. Now, if you are operating in a Retail business or environment, then the whole topic of Cash collection is barely relevant, if at all. For the rest of us, however, it is a critically important aspect of business survival. Credit Control (or Credit Management) is the name given to this particular business system and is probably the job that most of us hate most.
I'm going to be talking in a moment about how we can measure our success at Credit Control but firstly, we need to talk about the system you use to collect money due to you.
The whole point about any system is that it has to achieve something and in this case the "something" is to get paid. I'll come back to that in a second. So that we know WHAT we need to do, we need to know WHAT is happening right now.
If you use Sage or one of the other computer based accounting systems - or your accountant does the bookkeeping for you - you need to find out how long it takes you to get paid. This is always measured in terms of days. A regular reporting style would categorise how old debts are in groups e.g. under 30 days, 31-60 days, 61-90 and so on. You can segment the data in any way you want though to suit your business. Quite frankly, if you regularly send invoices to customers, and you are not using a computerised invoicing system, you should be.
Ideas for building a better Credit Control system
To build a better system of Credit Control, I believe there are a number of things you need to start with (not necessarily in this order):
- Check what your terms of trade says to your customers about payment
- Test if that is what actually happens
- Educate your customers - usually easier to start with new customers
- Set time aside every week to chase up on unpaid invoices
- Send statements regularly
- Always ask your customers - when you deliver what you do - how satisfied they are with your service/ product. If they are satisfied, there is little reason for them not to pay you. If they are not satisfied, you have the chance to do something about it there and then.
- Set yourself a simple target to start with e.g. no customer will owe me for more than 90 days, 60 days etc.
- Then try it out, come back after a month and see what is working and what is not. Make changes and try again.
