Dealing with debt collection to protect cash flow

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If you provide any form of credit to your customers and/or clients, you will need a debt collection procedure in place to protect the cash flow of your business. You will have heard that ‘cash is king’ for any business; this refers to the operating cash flow of a business. The debts that are paid to your business from your customers and clients are your operating cash flow.

It is vital, especially in the early days of your business, that you are paid by your customers and clients as quickly as possible, so that you can pay your debts as and when they arise.

Ideally, you should ask clients to pay upfront for your work or at least stage progressive payments as the work proceeds. If you are unable to do that then you should consider making payment due upon completion of work or delivery of your product.

It’s never late to introduce formal processes into a business

However, if your customers and clients need a little more time, use seven or 14 day accounts. The reason for this is that you will have accounts that will be due and payable at various times, and you must always ensure that your accounts payable do not exceed your debtors so that your business has sufficient operating cash flow available for you to pay off the debts of your business.

It is never too late to introduce formal processes into any business. Without the proper documentation, your business will face increasingly larger risks through the later phases of the business legal lifecycle.

The correct implementation of these procedures are essential for your business as timely payments of your debts will ensure that your business operates profitability and that you have plenty of cash flow.

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This is an extract from The Business Legal Lifecycle by Jeremy Streten – designed to guide and empower you with the knowledge you need to successfully navigate your business journey.

 

 

Read more with our helpful 3-part cash flow series here:
Part 1: Increasing cash flow
Part 2: Step-by-step guide
Part 3: Managing inventory

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Chasing debts: what are my options?

Jeremy Streten
Jeremy Streten is a successful entrepreneur, lawyer and author of the amazon best seller “The Business Legal Lifecycle” (www.businesslegallifecycle.com) which is a guidebook designed to help business owners understand what they are doing in their business from a legal perspective and give them a plan for the future.

1 COMMENT

  1. One of the many ways to implement procedures is to use a “Debtor Management System” such as ezyCollect. Which works for SMEs, and is plug and play with your existing accounting software.
    Some of the main benefits of a Debtor Management Systems include:

    -automate routine tasks with personalised, polite and persistent reminders for payments
    -utilise multiple communications methods such as sms, calls, emails, letters etc
    -schedule manual tasks,
    -manage disputes,
    -alert you before issues become too hard to manage and
    -plug and play into a credit card merchant system online
    -make it really simple to send “legal demands” and process to a debt collector

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