Cash reserves provide liquidity – the means to pay staff, vendors, and suppliers. It’s also a resource to draw from for operational needs, emergencies, or when times are tough. In other words, cash reserves mean security. It’s also your cash flow management that determines whether your business succeeds or fails. Even profitable businesses will go bankrupt when cash is poorly managed.

Cash is king

Cash is king is often what’s cited when a business fails. No liquidity is the main reason why businesses struggle financially. Your revenue may be high and your business model excellent, but if you spend all your money or have it all tied up in non-liquid assets, you’ll have a negative cash flow and your business’s financial health will be at risk.

Not having liquidity in your business also means that:

• You may miss opportunities to invest in new projects that will make you more money.
• You won’t be able to deal with emergencies as they arise.
• You can’t pay bills without running into debt and incurring interest.
• You will find weathering economic downturns extremely difficult if not impossible.

Do you understand the rhythm of your business? Does your cash inflow time well with your outflow (salaries, rent, supplier payments)? Do you have enough cash on hand to meet your obligations?

Cash flow and debt collecting

At some point, every company has a client that doesn’t pay on time, refuses to pay, or can’t afford to pay the full amount for services rendered. You’ll also come across customers who will go to any lengths necessary to avoid paying, those who have lots of payments due at once and pay them off sporadically, as well as those who normally pay on time but can’t because of financial issues.

It’s not enough for your business to only generate sales. Collecting payment for the products and services you’ve supplied is equally important – both need the same level of focus.

A debt collection plan isn’t something you put in place once you already have a problem with non-payment.

Designing and implementing a collection strategy for your business ensures that your accounts receivable stay under control and that you’re able to collect money owing to you.

Your collection strategy is your standard for how collections are handled – when you send your invoices, how often you contact your customers, and whether you make follow up calls. Without a strategy, you may forget about money owing, or your average overdue days will steadily increase.

A good collection strategy will also improve your relationship with your clients. Clearly defined terms ensure they know what to expect from the outset.

What should my strategy include?

Debt collection strategies include reviewing your invoicing and billing processes, hiring accountants, and understanding your clients’ payment processes.

6 tips to consider when creating your strategy:

Review your invoicing technology: Using Word or Excel templates for invoicing are time-consuming and fraught with possibilities for human error. Cloud-based accounting systems, such as Xero, track client interactions with invoices, automate follow-ups for unpaid invoices, and auto-populate invoice fields, among other time-saving automation.

Monitor your debtors: If your payment terms are 30 days, send reminders within a week of nonpayment. Your invoice could become a low priority if your customer thinks you’ve forgotten about it.

Keep it personal: Where possible, making a call to a customer is far more persuasive than a computer-generated reminder.

Increase directness gradually: If your call or personal email doesn’t result in payment, follow up with a letter. If more reminders are needed, you can word them more strongly.

Document everything: Should the debt ever lead to a legal battle in court, your ability to point to documentation will be very helpful.

Hire a collection agency: Consider hiring an agency. If you have a lot of debtors owing you money, you’ll be spending a lot of time trying to collect it. A debt collection agency will save you time and probably get you better results.

Bad debt

Bad debt, or doubtful debt as SARS refers to it, accrues when money due by a certain date isn’t paid. When debt reaches 90 days, it’s increasingly more difficult to collect. SARS requires that every appropriate step is taken to collect the debt, including exhausting both in-house and debt collection agency efforts, and that every reasonable avenue has been exhausted to be sure there’s no reasonable hope of collecting the debt before you’re able to claim a tax deduction.

Therefore, implementing a strategy to prevent non-payment should be given the same priority as your sales strategy.