Me: “How has business been?”

Dave: “Great, really busy, loads of new sales.”

Me: “That’s amazing to hear, but Dave, we need to talk about your cash flow. Your clients aren’t paying you…”

Dave: “Oh, yes, a few do, but now you mention it, I did need to loan the business £40k from my personal account last week!”

The above phrase is wheeled out at every opportunity when talking about cash flow but for an excellent reason. Where turnover and profit can be “adjusted” for reporting, there is no manipulating your cash. Either you have it, or you don’t.

Every business that fails does so for the same reason, they run out of cash. The reason for a lack of cash may differ (a good post for another day), but the outcome is always the same. As that last pound leaves the account, it signals the end in the same way we will all one day draw our last breath.

For those in SaaS or eCommerce, you have likely never felt the pain of completing work or selling a product and not being paid, but those of us in the service industry face this battle day in day out.

On a more positive note, it’s relatively easy to fix once you know what to monitor and have the right systems in place, so let’s dive in.

Average Debtor Days

This is one of the fundamental financial KPIs for you to track. Very simple to calculate but super powerful. It will tell you, on average, how many days it takes for clients to pay you. Whilst you can run this for any period, for most businesses, I would suggest using a monthly average debtor day. This is how to calculate it:

Monthly Debtor Days = (Accounts Receivable / Monthly Sales*) * 30

i.e. a business with £20k sales for the month and £120k owed at the end of that month (accounts receivable) would look like this:

(120,000 / 20,000) * 30 = 180 days

180 days, oh dear! This might seem a strange example, but these were “Dave’s” debtor days when we sat down to investigate.

• If you have a mix of cash and credit sales, you should try to only include credit sales here but don’t overthink it. Tracking all sales is much better than not tracking at all!

Interpreting your Debtor Days

Are my debtor days good or bad? That depends on a few factors, but most importantly, compare this to the stated credit terms you offer clients to gauge.

When you start to put systems in place to actively manage your client debt, you should very clearly see a visible decrease in the number of days to reflect your success.

Whilst most business owners can grasp the concept of debtor days, very few understand the impact a change in debtor days has on cash.

1 debtor day = Accounts Receivable / Debtor Days 

In our example above, for every day Dave can reduce his debtor days, he frees up £666 in cash. If he manages to get Debtor Days down to a much more reasonable 30 days, this will free up a whopping £100k cash! It was an easy decision to then invest a little money in getting a system set up and someone to run it for him.

Beware of Hidden Days

It is important to point out that the debtor days KPI shows how long it takes to get paid once the invoice has been raised. It’s common in many businesses and was definitely the case for Dave, that there is a lag between when he should have invoiced the customer and when he actually did.

Dave told me he would guess he raised invoices 30 days later than he should have. So this means his true debtor days would actually be 210 (180+30).

Some tips for addressing this issue:

1. Use repeating invoices to automate this completely where amounts are constant.

2. If you have a repeating invoice, but the amounts differ, set the repeating to draft and manually amend the invoice totals.

3. Think about when you are invoicing. Do you really have to wait until work has been completed before raising the invoice?

4. Use Zapier or integrations to link your workflow system to Xero to automate invoices.

5. Train your team to raise invoices. Please don’t become the bottleneck (I see this all the time).

Your Debtor System

Here are the key points to consider when building out your system because it will only happen with a system!

Credit Check

Credit check your customers before working with them. Let this dictate, or at least influence, the terms you offer rather than instantly offering the same generous terms to all new clients. There are providers who make this super easy and relatively low cost. I like Satago as they have other features to help with credit control too or you could use someone like Credit Safe.

Remove the friction

You must make it as easy as possible for your clients to pay you. Asking for a bank transfer will always be the slowest way to get paid.

Add “pay now” links to your invoices. In Xero, you can easily do this using Stripe to capture online card payments at the point of invoicing.

Better still, get all repeating customers on to Direct Debits. We use GoCardless, which is easy for the customer, simple to manage on our end and relatively cheap for the benefit it brings. GoCardless even has direct integration with Xero, making reconciling the money received even easier. GoCardless is restricted to UK payments only and starts with a limit of £5k per invoice collected, although this can be extended by request.

Discounts for early payments

It can be very effective to offer a % discount in exchange for earlier payment but be very aware of the costs this brings by way of reduced profits. This works best as a last resort for those with decent profit margins (so you can absorb the cost) and is turned on and off depending on how healthy your bank balance is. Do not offer this to all clients on an ongoing basis!

Credit Control System

Here are my top tips for building your credit control system:

• Turn on automated chase emails in Xero (most software have this).

• Map out a manual escalation process that involves phone calls.

• Create scripts for these calls.

• Make someone else accountable for this job.

• Or outsource it to your accountant.