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How to reduce the debtors’ balance in small businesses

Updated on :  

08 min read.

Debtors and receivables control is a crucial part of running a business successfully. Although an important scheme in sales, credit policies may expose a business to certain risks such as reduced cash flows, increased cost of debtors, and larger unpaid debt. Hence, optimisation and improvement of the receivables process ensure benefits in the long run. 

Ways to reduce and optimise debtors balance

  1. Defining Credit Terms: A credit policy defines the facilities that could be offered to the customers. It is known that a lesser credit period results in a lesser debtor balance. Establishing a defined credit period for customers can help prevent the risks mentioned above. A credit period lesser than that offered by the business’s suppliers can also help prevent a shortage of cash in hand. A few things to be kept in mind while setting credit terms are modes of payment, credit limits, early payment rebates, and customers’ creditworthiness.
  2. Credit Control Activities: While many big organisations have robust and dedicated accounts receivables and payables management systems, small businesses may also adopt various activities which can aid in controlling credit balances:
    • Maintaining records of cash received and payments.
    • Regular follow-ups with debtors.
    • Regular reconciliation of sales ledger, debtors’ ledger and ageing reports.
    • Appointment of a person or department as per requirements for exclusively performing functions and procedures of accounts receivables.
  3. Incentives for Early Payment: This policy serves many benefits: 
    • It ensures a quick and sure settlement of dues.
    • Reduces the cost of debtors.
    • It may instil a sense of satisfaction for the debtor, leading him to come back in the future.
  4. Diversification of Customer Base: Having a diverse client consisting of large and small clients is beneficial for running a successful business. Large organisations will be offered longer credit periods. In such cases, it is useful for having smaller clients who will pay on time to maintain a healthy cash flow.
  5. Procedures for Overdue debts: Overdue debts will require special attention and persuasive actions. Some procedures are as follows:
    • Sending notices and reminders.
    • Call the customer to understand whether there may be a problem and remind them to settle the debt.
    • Reviewing credit terms with customers in case the problem recurs.
    • Keeping a record of correspondence with the customer.
    • Consider legal avenues to recover the debt in case all means have been attempted.
  6. Legal Procedures:  Debtors can be chased through legal means. Such an extreme step is pursued when the problem persists to the extent that it has resulted in a significant waste of time and cost. The business may now send a legal notice seeking a reply from the customer, whose default may lead to legal consequences. Some organisations that can offer legal help include Small business commissioners, ombudsmen, claim tribunals, community legal centres, debt collectors, or courts of various levels depending upon the amount of claim.

Debtor management varies in every business depending upon the business activities, and businesses have to understand the nature of their business before defining credit terms for debtors.

A business may choose to optimise their debtors’ and receivables policy in certain areas or revamp the whole policy at once. The above points, if implemented, will offer long term benefits and help maintain a healthy relationship with customers.