Mentor: How to keep your debtors under control

Q: How do I manage my debtors and why is this important?

Bruce Cross, Northern Regional Manager, of RMG NZ responds:

Even profitable businesses go broke. Cashflow is the lifeline of any business, particularly a growing one. With cash, you can develop your business and take advantage of opportunities as they arise. Without it, you restrict your operational parameters and increase your risk of failure.

In its simplest form, sales equal cash, but in a competitive market, you will find that to win business you may need to allow credit terms to your clients.

This means that to control the liquidity of your business, you must manage and control one of your biggest assets - your debtors.

There are several ways to control your cash flow to protect your business's short-term reputation and position. Initially you should set credit goals that reflect your business needs:

What risk shall I take?

What terms should I give?

What risks may I be forced to take?

Will collection be a problem?

How much time will it take up?

How many losses can I expect each year?

Do I need expertise in credit?

The answers to these questions explain your company's objectives in issuing credit, and create a platform for controlling customer selection, cash recovery and ensuring the whole operation works efficiently.

Your next key task is to create day-to-day procedures to ensure you manage towards those goals.

* Establish a sound credit application policy for new clients.

* Establish your terms of trade (you may want legal assistance with this).

* Create a credit policy and stick to it.

* Set performance indicators for managing your debtors. A common measure is the average number of days it takes for your debtors to pay you.

* Ensure regular contact with debtors and record what they say;

* Ensure all staff (particularly sales staff) understand your company's risk, terms of trade and how the credit policy works.

* Take calculated and controlled risks.

* Be aware of current credit management practices (look for courses).

* Give outstanding customer service.

* Involve senior credit control staff in decision-making and business planning.

* Know your market and the economics of that market.

* Most importantly, don't be afraid to seek guidance from professionals and organisations such as Business in the Community.