Why it’s vital to keep tabs on debtors

While the festive season has many of us excited for shutdown periods and well-deserved time off, it also marks an important point in time for businesses to assess their financial wellbeing and adjust for success.

The end of December and start of January heralds the mid-point of the financial year for some, the year-end for others. Unlike the end of 2021, when we looked at the new year with hope for growth, this time business leaders and their financial departments view the future with more trepidation, given the uncertainties being felt across the market.

Most businesses are in a very different state to where they were pre-COVID, with a range of macro-economic forces shaping their response to risk. CreditorWatch’s latest Business Risk Index, for example, shows that the usual trade momentum we see going into December has failed to materialise, and we’re likely to see a subdued Christmas trading period that will worry retailers and the food and beverage sector. Separate to that, our data shows that businesses typically experience a drop in cashflow of around 20 per cent over January and February.

While Australia’s economy is still better performing than others that are edging towards recession – like the US and the UK – and we seem likely to avoid it as a result, businesses and consumers alike are more cautious than before.

In this turbulent environment, it is increasingly important to look out for new and emerging risks to your ledger and protect it over the festive season. Doing so will set your organisation up for greater success in January and beyond. How does one gain this visibility across their ledger? You need transparency across your systems and to use tools that give you a bird’s eye view of your debtors’ payment behaviour. This allows you to identify slow-paying debtors and mitigate risks accordingly.

I don’t need to tell an accounting audience that late payments negatively impact the health of your ledger and subsequently affect your cash flow. But are you aware of the range of factors that might be driving late payments from your debtors? By gaining a clear understanding of which customers are paying you late or failing to pay, and where possible, why, you can expedite debt collection or remove them from your ledger to protect your business from bad debt.

Debtor management tools help you stay on top of your debtors and protect the health of your ledger. Look for a tool that reveals credit risks within your ledger by conducting a data-driven analysis of your aged trial balance. The same tool should allow you to assess trade payment data and give you transparency on the behaviours and trends of your customers – including their payment and risk scores.

Learn if your debtors are paying their other suppliers on time, and how you’re being paid in comparison to the market. If you’re being paid as expected these tools can also show if the debtor isn’t paying their other suppliers on time, which indicates they might be financially struggling. Or, if they’re paying other suppliers on time but paying you late, they could be doing it deliberately and using you as a bank of sorts. These are warning signs to help you identify high-risk debtors in your ledger.

Debtor management tools empower you to take a more targeted approach, highlighting the best and worst customers in your ledger. You can then strengthen the health of your ledger by avoiding slow paying customers and further incentivising those that are paying well. It means you can reduce days of sales outstanding and improve the overall collection rate of your portfolio.

Collections can also be streamlined with automated debt recovery tools. Your debtors are reminded and prompted to make payments when they’re due, using process automation and customisable workflows. This frees up your accounts team to focus on complex, value-adding work instead.

A robust, proactive approach to debtor management helps you stay ahead of any risky behaviour and uncover warning signs prior to any impact. You’ll be better equipped with data that helps you prioritise collections and proactively deal with problematic debtors before they can detrimentally impact your cash flow.

A healthy ledger gives your business the opportunity to grow and employ more staff or pay your suppliers early and gain access to early payment opportunities. 

With smooth cash flow, your businesses can run more efficiently and plan for the future. It’s a two-pronged strategy that helps you gain control and maintain resilience in these uncertain times, meaning you can better position your business for growth.

Patrick Coghlan is CEO of CreditorWatch.