Graham is a specialist in this area and he gave us some very simple and clear messages that we could take back to our clients that apply whatever the size of their companies - start-up, sole trader, micro business, small business or SME.
In a nutshell, the message is this: send out the invoice as soon as you ship the goods, and contact the client regularly to progress the invoice through to payment, on time. Pretty obvious really, but not being done by a surprising number of the business we advise.
DSO - Days Sales Outstanding
Also known as debtor days, this is the average number of days your clients take to pay their invoices.
Let's take a business that has a turnover of £1,000 per day - £365,000 per year - typical of many small businesses with a couple of employees. If its clients owe them £75,000 then their DSO is 75 days - 75 days at £1,000 per day - that is what it means.
The DSO for your business is just the total debt owed to you divided by your average daily sales.
What does DSO tell us?
Well, the £1,000 a day turnover company traded on 30 days terms so it could reasonably expect to get paid on 45 days - if you invoice in the middle of a month the earliest you could expect to be paid by most customers is the end of the following month - and so it could reasonably expect to have a debt of £45,000.
Just imagine the impact on cash flow of reducing the DSO to 45 days - a £30,000 improvement. Even a 10 day improvement in DSO for them would improve cash flow by £10,000 - worth going for.
Effect on overdraft
Graham reminded us also that companies often find they have to borrow to fund the excess credit they give to their customers. Lets say our sample company had an overdraft of £30,000 at an interest rate of 12% - essentially funding the gap between 45 days and 75 days DSO.
The cost to them of funding that gap would be an additional £3,600 in bank interest, not counting the bank charges that go with it. That is an extra £3,600 cost to their business for giving their clients excess credit on interest-free terms - madness really.
This is what we mean by making money by not spending money on your debtors. You could save the cost of bank interest by improving your DSO.
Invoice on time
Strictly speaking DSO does not include your delay in sending out your invoices, but the impact is the same and the easiest way to eliminate that is to send the invoice out as soon as you have shipped the goods or supplied the service.
Manage your clients payment expectations
This is where Graham's advice is like gold dust! He advises contacting the client at least three times between invoicing and collecting the money:
- The day after you send out the invoice to check the invoice has been received and there are no issues with the goods or services supplied
- 5 days later to carry out the same checks, so that there no excuses on that front
- 5 days before you expect to get paid to make sure your invoice has gone into that month's payment run
That way your customers will get to know your expectations on payment. They will often delay paying their suppliers where they can get away with it to improve their own cash flow, but if you chase them - nicely - they will get to know that you expect to be paid on time and they should act accordingly.
We can help
So you are going to invoice on time and contact your clients regularly to ensure payment on time, but you still have a number of significant debts that are proving difficult to collect. You need help in collecting the debts and in ensuring that such debts are less likely to occur in the future.
Contact us by email on enquiries@sussexbusinessadvisors.com for a free initial discussion of your issues, and we can put you in touch with specialists such Graham if we feel that is the way you should go.
Make money by not spending money on your debtors - now there's a thought.
Excellent stuff Peter - far too many small businesses fail to pay enough attention to cash flow. There are similar tips on my blog (below) as well.
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