Managing debtors to unlock cash trapped in your business

You are likely sitting on R500,000 in accounts receivable that has not cleared your bank account for three months. For a South African SME, this is not just a bookkeeping issue; it is a direct threat to your ability to pay suppliers and staff. While SARS allows you to reclaim value-added tax on debtors older than six months, that relief rarely covers the full operational gap left by slow-paying clients.

This guide breaks down a practical method for managing these overdue accounts. It includes a worked example to show exactly how to convert stagnant debt into usable cash flow.

The Problem of Managing Debtors

The problem of managing debtors is a common issue faced by many businesses in South Africa. When customers do not pay their debts on time, it can cause a significant cash flow problem for the business. This is particularly true for businesses that offer credit terms to their customers, such as 30 to 60 days. According to a report by the Small Enterprise Finance Agency (SEFA), the average days to pay for small businesses in South Africa is around 70 days. This means that businesses have to wait for an average of 70 days to receive payment from their customers, resulting in a significant amount of cash being tied up in debtors. For example, if a business has R100 000 in debtors, and the average days to pay is 70 days, the business will have to wait for 70 days to receive the R100 000, which can cause a significant cash flow problem.

In addition to the cash flow problem, managing debtors can also be time-consuming and costly. Businesses have to spend time and resources to chase up customers for payment, which can be a significant distraction from the core business. According to a report by the Companies and Intellectual Property Commission (CIPC), the cost of chasing up debtors can be as high as R500 per hour, which can be a significant expense for small businesses.

The Method to Manage Debtors

The method to manage debtors involves a combination of strategies to minimize the amount of cash tied up in debtors and to reduce the time it takes to receive payment from customers. One strategy is to offer discounts for early payment, such as a 2% discount for payment within 10 days. Another strategy is to charge interest on late payments, such as 1% per month. According to Investopedia, offering discounts for early payment can be an effective way to encourage customers to pay their debts on time.

Another strategy is to use a debtors management system to track and manage debtors. This can include using accounting software such as Sage or QuickBooks to track debtors and send reminders and invoices to customers. According to a report by Sage, using a debtors management system can reduce the time it takes to receive payment from customers by up to 50%.

In addition to these strategies, businesses can also use financing options such as invoice financing or factoring to manage debtors. According to a report by the South African Institute of Chartered Accountants (SAICA), invoice financing can provide businesses with up to 80% of the value of their debtors, which can help to improve cash flow.

A Worked Example of Managing Debtors

To illustrate the concept of managing debtors, let’s consider a worked example. Suppose a business, XYZ Pty Ltd, has R100 000 in debtors, and the average days to pay is 70 days. The business offers a 2% discount for payment within 10 days, and charges 1% per month interest on late payments. Using a debtors management system, the business is able to track and manage debtors, and reduce the time it takes to receive payment from customers by 20 days.

Using the debtors management system, the business is able to send reminders and invoices to customers, and to track the payment history of customers. The business is also able to use financing options such as invoice financing to manage debtors. For example, the business can use invoice financing to receive up to 80% of the value of their debtors, which can help to improve cash flow.

By using these strategies, the business is able to reduce the amount of cash tied up in debtors, and to improve cash flow. For example, if the business is able to reduce the average days to pay by 20 days, the business will be able to receive R100 000 in payment 20 days earlier, which can help to improve cash flow. In addition, the business will be able to save on the cost of chasing up debtors, which can be as high as R500 per hour.

How to Apply the Method to Manage Debtors

To apply the method to manage debtors, businesses can follow these steps:

• Review the debtors list to identify customers who are slow to pay, and to determine the average days to pay.
• Offer discounts for early payment, such as a 2% discount for payment within 10 days.
• Charge interest on late payments, such as 1% per month.
• Use a debtors management system to track and manage debtors, and to send reminders and invoices to customers.
• Consider using financing options such as invoice financing or factoring to manage debtors.

By following these steps, businesses can reduce the amount of cash tied up in debtors, and improve cash flow. In addition, businesses can save on the cost of chasing up debtors, which can be as high as R500 per hour.

It’s also important for businesses to ensure that they are compliant with the relevant laws and regulations, such as the Protection of Personal Information Act (POPIA) and the Broad-Based Black Economic Empowerment (B-BBEE) regulations. According to the B-BBEE Commission, businesses that are compliant with the B-BBEE regulations can benefit from improved access to financing and other business opportunities.

Common Mistakes to Avoid When Managing Debtors

When managing debtors, there are several common mistakes that businesses should avoid. One common mistake is failing to review the debtors list regularly, which can result in slow-paying customers being allowed to continue to accumulate debt. Another common mistake is failing to offer discounts for early payment, or charging interest on late payments, which can result in customers being less likely to pay their debts on time.

Another common mistake is failing to use a debtors management system to track and manage debtors, which can result in a significant amount of time and resources being wasted on chasing up debtors. According to a report by the National Small Business Chamber (NSBC), using a debtors management system can reduce the time it takes to receive payment from customers by up to 50%.

To avoid these mistakes, businesses should ensure that they have a clear and effective debtors management strategy in place, which includes regular reviews of the debtors list, offering discounts for early payment, and using a debtors management system to track and manage debtors.

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