The Wise Entrepreneur

7 Tips to Ensure the Best Management of Your Debtors (Receivables)

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Now, it appears that for the majority of enterprises, the topic or element of debt or receivables is one that cannot be avoided. I’m talking about debt in the aspect of monies customers or clients owe to the business, not the other way round with the business owing another entity. Why debtors or receivables? The answer is simple. The unavailability of ready cash to pay for goods and services should not ideally stop business. Sales of products and services should continue under normal circumstances to people and entities that are interested in them, and are willing to pay for them in the near future. Gone are the days when you needed to suffer until you have saved enough money (either in a box in your house or in your bank account), before you could have the courage to go and buy something. Buying on credit is also a tool used by some enterprises to manage their cash flow or liquidity. It’s normal in today’s world.

However, do enterprises actually manage very well their debtors or receivables? Do entrepreneurs know how to make the best of their receivables? What are the best practices regarding management of debtors and receivables that an enterprise should adopt? We could turn this question upside down and down upside but the whole thing lies around the best approaches to managing debtors or receivables. Do you understand me? So, today I want to write about this. Today I’m going to give you 7 tips to ensure the best management of debtors or receivables in your business. Again, as I always say, it’s a free world. If you are already practicing these principles and you think you will get no value from this blog, simply run. Ok? It’s better than reading while complaining about how I ‘wasted’ my time. I know that there are thousands (probably millions) of entrepreneurs out there that need these materials.

So, what are these points that can guarantee you the best from your receivables or debtors?

  1. The trade-off between cash and credit sales. A good starting point for you Mr. Entrepreneur is a clear understanding of the trade-off between selling purely on cash basis or prepayment, vs. selling on credit. This trade-off is a critical decision to make, and will determine your strategy, policies and procedures to guide management of receivables. I mean, you could decide not to part with your goods and services before seeing physical cash (you get what I mean) or a cleared cheque on your bank account, or some wire transfer (don’t ask me why they call it wire) with evidence. You could be very vain about that and even swear not to part with anything until your sales conditions are met. However, while this approach of course has its pluses, the minuses might be very costly. This is why most enterprises also sell on credit. Don’t be too smart and think that people who sell on credit are dense. Ok? Receivables are a strategy and an investment. You can wisely optimise credit sales to attract customers, boost sales, reduce costs and debt and also manage competition. It might also achieve some other objectives for you. This means that you need to decide on this trade off. You will sell some things or sometimes on cash basis and you will sell some things or sometimes on credit. Do you agree with me? Come on my dear entrepreneur! With this fundamental understanding, you certainly have a solid foundation to build your debt management strategy and tactics on.
  1. Understand the scope of receivables management and place the right emphasis at each stage. Receivables have these three critical stages – checking credit worthiness, granting credit and then cash collection. You have got to be smart Mr. Entrepreneur. You are not going to be dumb and give anybody credit. If you do so you have only yourself to blame. Don’t you agree with me? Some people and even companies are terrible, and there are usually tell-tale signs. You can make use of financial statements, press information, credit agencies, trade and bank references, and other credible sources of information to check creditworthiness of your potential debtor. The second stage of receivables is granting credit, where you consider factors such as credit terms and limits, record keeping for receivables, credit approval process etc. Again, if you are clueless and do not even have payment terms for your goods and services, that’s up to you. Collection of cash involves debt categorization and targeted collection and recovery approaches. My dear entrepreneur, you also need to understand how to evaluate your accounts receivable management, using tools such as aged analysis, average days it takes to convert receivables into cash (days in sales outstanding), average number of times receivables are collected in a period (receivables turnover ratio – the higher the better). Now, don’t expect me to also define these for you. You also need to do some work as we share knowledge and make use of it. I’m giving you tips my friend – and you can look for the formulae and ram the numbers down your calculators or computers or whatever and get the answers you need. OK? You need to understand your cash conversion cycle, net working capital, current including quick ratios etc. Understanding the scope of receivables management, and placing due diligence in all the relevant areas, is another key step in ensuring the best management of your debtors or receivables.  
  1. Collecting money and dealing with the bad elements. Now, let me talk about how to get the money into your coffers. This is a stage where sometimes people feel like rearranging one another’s faces when things turn nasty. Most clients will pay their debts, unless you are simply in some very bad part of the world with a high population of cheats. You get what I mean? It’s honorable to pay debts, but there are some human beings who will simply not pay until you push them. Some need to be embarrassed first before they pay. When such creatures are in control of enterprises then that habit becomes that enterprise’s culture. To improve recovery, consider aspects such as sending routine statements – at least monthly, personal approaches and phone calls. I’m assuming that you are already taking advantage of electronic invoicing and forwarding of invoices and statements. If you still want to shout at your messenger or courier company agent to physically deliver invoices quickly enough, using some bike across a large city, that is candidly your own business. Do you understand? You can decide to walk around the city distributing invoices if you like. Consider also multiple payment options to make life easy for your clients or customers. Some clients also enjoy early payment discounts so you could entice them with that approach. Invoice discounting agencies can also pay you early and then collect the debt with interest and other charges. Debt factoring is also an approach to promote early collection of receivables. When you see some signs of stubbornness (I mean those Homo sapiens who find it very difficult to pay what they owe), reminder letters, mails and even suspending supplies of goods and services can be options. Try and see early warning signs. For the bad clients, cut out credits, or even use punitive measures such as interest surcharges. Going legal is another option, thought it comes at the cost of the relationship. By the time lawyers exchange letters or you meet in court, love is long gone. Don’t you agree with me? For the cooperative ones with past due accounts, you could consider a payment plan. What I’m saying is this; optimise your debt collection using the most relevant and applicable method depending on the client, but remember that good initial screening can help you avoid much headache with stubborn debtors. Remember, I’m not telling you to re-arrange somebody’s nose, or bang your truck into his business premise gate! Ok? You will not be a wise entrepreneur then. I want to develop wise entrepreneurs! Not the opposite!
  1. Happy customers and clients are very likely to pay bills on a timely basis. By the way, this is a natural law of restitution that oftentimes works in your favour while managing debt. This is another important tip for best management of debtors or receivables. If you are excellent in product and service quality and delivery to your clients or the market, you create a psychological commitment and reciprocity. Get me right here please, and don’t twist this point upside down. I’m not meaning that you should work for excellence in a hopeless way, as a means to gain some favours. I’m simply highlighting some principles of nature. So, do you add real value to your clients? Do you deliver credible solutions to peoples’ and enterprises challenges or meet needs, through your business? If you do, there should be good reasons for your clients to make your receivables management process easier for you. Don’t you think so? Of course there are still exceptions with some greedy ones who want to benefit twice, first from very good products and service and then from very delayed settlement of bills. Relationship management is vital. Good service generates interest in paying debt. However, if you are always in shouting matches with your customers on one end complaining about poor and unfinished work, and you on the other end demanding your dues, then you are in for some trouble.  Can you just imagine how wide that expectation gap would be! Does that gap allow free flow of monetary benefits and related matters? Let me run before you give an answer!
  1. Tax and legal implications of bad and doubtful debts. Business or enterprise cannot be separated from taxation. If you are an entrepreneur who avoids tax like a plague, I can easily foretell the end of your business. It’s disaster or near-disaster. Period. Don’t hate me because of this viewpoint Mr. Entrepreneur. The thing is, you can only evade tax for a while but when the law catches up with you, that business of yours might not survive. By the time you have evaded tax for ten years and the taxman comes demanding that tax with penalties, interest surcharges etc., your business will be near-finished. At that point, even your favorite bank manager might not be interested in meeting you, leave alone lending more money to some stubborn, non-law abiding ‘investor’ or entrepreneur. Let me get back to my point by the way. You cannot say that you are managing your receivables in the best possible way, when you ignore the tax implications of your receivables. Are you following me? You need to know that the tax man will add back your doubtful debt provisions to your profit and tax it. You also need to know that any bad debts written of in your books, not properly supported with evidence of your efforts to collect that so-called bad debt, will be added back to your profits and taxed. Poor documentation of debts can also spoil a court case for you. For example, if you can’t even show that judge that you are learned enough to have documents such as Goods Received Note, Delivery Note etc., your case against a debtor might be thrown out at your costs. These are the reasons why I candidly think that tax and legal aspects have to be taken into account among the best practices for managing receivables. Be smart!  
  1. Consider other risks related to receivables. Additionally, the best debt management practices need to consider other broader risks related to debt beyond just collecting cash. There are other aspects such as diversion of goods, teeming and lading (delayed accounting involving allocation of one client’s payment to another to balance the books by your own staffs) etc. In some enterprises, payment systems are not well managed, and you find staffs moving with huge sums of money in the name of debt collection. This is worse in economies where people trust hard cash (even if it looks fake), more than cheques. Now, you don’t need to disbelief me. I’m talking about realities on earth here. Where physical cash is involved, the risk of cash in transit etc., exist. Would you want your debtor to pay your money and then that money disappears before hitting your bank account? Of course not. These, plus other areas of risk and complications of credit sale and debt management, including receivables insurance, are still part of receivables management though leaning more on general business risk management.  
  1. Consult the experts if required. My last tip about best practices in managing receivables, is a very lazy and yet critical one; use of experts. I know that experts encompass every area of business, and there are also experts that can guide your enterprise to deploy IT, human resource capabilities, policy and strategy etc. to improve your control and management of debtors or receivables. The point is this, there are businesses that can easily identify and know that debt management is a disease in the enterprise, but will not have what it takes to provide and implement solutions. The reasons could be many, and this might involve the use of experts to address. Some people say that experts often come to tell business owners what they already know. I partly agree with that, but it also depends on the kind of experts you are dealing with. There are levels.

And now, as I move to a swift conclusion of this blog (because I’ve written quite a lot today), I would like to mention that management of receivables is something not to be ignored. It pretty much does not matter what the size of your business is, as long as you sell or render service on credit. If you ignore this, your business might ignore you in due course!

With best wishes for a successful receivables management in your enterprises, always

The Wise Entrepreneur

Clayton W. L. Mwaka

Clayton W. L. Mwaka

Clayton W. L. Mwaka, a Ugandan chartered accountant and motivational speaker with 24 years of diverse experience, specializes in business administration, international consultancy, and lecturing. He advocates for personal empowerment through balanced living, qualitative leadership, and paradigm shifts, aiming to unlock individual potential globally.

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