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Kiwi SMEs’ face ‘self-inflicted’ $96,000 problem

Fri 24 Feb 2017
FYI, this story is more than a year old

A new study reveals that New Zealand SMBs are missing out on $18,000 per day because “small businesses are terrible at chasing customers for money.”

A study from NZ-based receivables analytics company Debtor Daddy has revealed that 80% of SME's are under “moderate to very severe” cashflow pressure due to mismanagement of their debtors.

According to the survey, the average Kiwi SMB has $96,000 in owed outstanding invoices — an average of $18,000 outstanding per day. Furthermore, around 40% have more than $20k worth of owed invoices that are more than 60 days overdue.

“The irony,” says Matt McFedries, CEO and co-founder of Debtor Daddy, “is that the 90% of the cashflow pressures businesses face are actually self-inflicted. They simply wait far too long to demand payment.

It’s time to stop blaming your clients or ‘big business’ for your cash flow woes and start looking at your internal processes for collecting the cash you’re owed”.

The study also found that 61% of small business have more than 20% of their receivables aged 60 days or over, and over 20% have more than $50k older than 60 days overdue.  

McFedries says the main reason small businesses find themselves with too little cash for the day-to-day running of the business is simply a “lack of consistent follow up”.

“Most small businesses don't have the resources to hire a dedicated credit controller,” he says, “so the job falls to the business owner or office administrator.

Typically this person has limited training in the nuances of managing overdue accounts, and usually has a hundred other things to do as well. Simply put, small businesses are usually just terrible at chasing customers for money.”

“When a bank or finance company lends money to people you can rest assured they have a plan for collecting their cash in the event of non-payment.

A single missed payment triggers a well-designed process involving multiple communications with the debtor via email, phone and letter and maybe a few threats. If the bank deems the account unlikely to be paid, then it's off to the debt collectors quick smart, so you're first in line if the debtor's business is failing.”

“For many businesses credit control falls into the ‘too hard’ basket. Yet when cash is tight it consumes a massive amount of headspace for business owners, wondering if they'll be able to meet payroll.”

The crux of the problem according to McFedries is that SME's are all too good at coming up with excuses not to chase customers for money.

“Sometimes it's because the customer has all the power, and business owners fear that if they enforce their payment terms then the customer will simply find another supplier.”

“This is true in some cases, however the majority of the time it comes down to time, or lack of time. The business owner who's trying to act as the credit control department in the evenings simply lacks the bandwidth and focus to do a great job. The key to good credit control is all about the follow up. The follow up must be consistent, well-timed and unrelenting. It's your money, why should you stop chasing it, ever?”

“That hesitation is understandable of course,” he says. “Poorly managed payment chasing really can sour customer relationships. This makes for some really difficult conversations and emails, straining the once friendly relationship and making doing future business with the customer less likely.”

McFedries recommends that businesses facing debtor issues keep in mind is that the goal of any credit control action is to secure a promise-to-pay.

“It's not personal and it's not punitive,” he says, “rather it's a simple request from a seller to buyer asking the question ‘when do you intend to pay your bill?’. If the buyer cannot make the promise then clearly there is a problem that needs to be gotten to the bottom of.”

“Having a process and sticking to it is the most important thing,” says McFedries. “It's as simple as having a defined follow-up process that get's triggered anytime an account falls overdue.”

When an account falls overdue, Debtor Daddy — a specialist receivables management company — recommends the businesses:

  1. Send friendly reminder via email or SMS
  2. Make a friendly phone call to get a promise to pay
  3. If the promise-to-pay date is missed, another phone call should be made to secure a further promise (or offer of a payment plan)
  4. Email reminders/alerts to monitor promised payments

If promised payments continue to be missed then stop offering credit to the customer (If the customer is too valuable to stop credit for then consider invoice finance)

While the process looks quite straightforward, McFedries warns that sticking to the plan can take anywhere from several hours to two days a week to implement.

“Time is something most SME business owners or office managers simply don't have, so that’s where software can help. If you can virtually manage that process, and limit human intervention to key moments when a phone call or decision is required, cashflow crunches can be almost entirely avoided.

Fortunately software is now available to solve this problem cost effectively for small businesses. We offer the Debtor Daddy solution from just $29 per month for small businesses, and with that any SMB can significantly reduce the time they spend managing debtors and secure themselves tens of thousands of dollars more over the course of a year.”

Article by Jonathan Cotton, content marketing manager at Debtor Daddy​

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