Overdue Debtors – Causes and Impact

Economic downturns have a detrimental impact on the cashflow of the company. While the company can control the INVENTORY, CAPEX and OPEX Payments – the process they cannot control is when their Debtors will pay.

Economic hardships hurt everyone equally and all companies try to hoard cash and delay the payments – they want to protect their business first.

Most companies do not grow due to lack of cashflow, rather than profit.

Delayed and Difficult Debtors can hurt a company by putting pressure on the working capital and cash flow management. The company may be forced to borrow to meet their working capital needs OR the sales team spends more time chasing customers for money, rather than on sales – further impacting the company.

To get paid on time sounds logical and simple, but in reality, it is complex and a factor of multiple processes.

• Order to Invoice – Ensuring that customer orders / PO’s are punched carefully, and the invoices are raised accurately, on time and dispatched on time

• Invoice to Cash – Ensuring invoice receipt, dispute identification and resolutions, invoice accounting and timely payment release and payment advises for proper adjustments in the books

The above processes have to be managed with discipline, while at the same time continuing good relationships with the customers.

Reasons for Overdue Debtors and Trapped Cash

• Sales teams don’t have the time to chase collections – would rather focus on sales
• Customers use the vendors as a “Bank” – they use someone’s funds to run their business
• Customer pays the client, who calls more often – have to build “payment release recall”
• Customers never inform the issue that they have with the invoice – wait for follow up, they will never pay, if issue not solved – commercial / service issue
• Companies have a head count issue – have to increase revenue, with limited resources

A thorough analysis of the order to- cash cycle can lead not just to a one- time recovery of a delinquent account but to lasting gains for the company.

Tasks for “Order to Invoice” Processes

To improve cash flows, companies focus on activities that takes place after the product and services are delivered. But the potential of getting cash trapped can take place before the contract is signed. Avoiding bad accounts and customers with a bad paying history is easier before the product/services are sold. Clear policies and due diligence go a long way toward avoiding problems later.

Ensuring proper and accurate invoicing and compliance to the customers PO terms can avoid payment disputes at a later date.

Validating that the customer has received the invoices, will preempt any customer claiming at a later date that they have not received the invoice. (This reason has the maximum excuses and causes the most delay)

Companies can further instill discipline in their customers (especially Trade Customers and SME’s) and reduce the risk of bad debts by setting and enforcing credit limits and credit period blocks. Advance knowledge of credit blocks can help companies to follow up with defaulting customers and war customers in advance about potential stoppage of services / product in case the payment is not made.

Clear credit policies will help in reducing trapped cash / overdue debtors and the weight of bad payers on the receivables portfolio.

Tasks for “Invoice to Cash” Processes

No one pays without multiple reminders and the client who follows up – gets paid.  The sales team have a core job – sales and they like to sell, rather than collect.

There is a conflicting relationship of the sales team with the customers – ask for money OR ask for business. Further, the sales team leave a company and not an industry, therefore in future they will have to go back to the same customer for business.

Lack of follow up slows down every aspect of cash collection from identifying invoicing issues, to dispute resolutions to finding out when the invoices will be paid.

Debtors take advantage of the lack of follow up and then raise petty issues to delay the payment, as much as possible.

The follow up process can be exhausting for the sales team and ultimately impacts sales.

Conclusion

Debtors collections is a processes that needs to be managed actively, some good customers will pay on time, but the defaulters and those who don’t pay on time need a dedicated follow up process, so that they don’t roll over into higher ageing buckets

It’s important to make sure the cash keeps coming in. Timely cashflow will ensure companies are in a better position to invest in growth and pay dividends etc.

To best optimize the cashflows, the bottlenecks in the processes – Order to Invoice and Invoice to Cash and the continuously delaying customers need to be identified to that the systems can be managed to avoid future delays.

About GGA

GGA India Private Limited  (GGA)  is  a  focused  “Business  to  Business”  Account. Receivables Management  (“ARM”)  Service  Provider.  GGA  concentrates  exclusively on designing, developing and implementing customized B2B debtor collections solutions for its clients.