Essential Steps for Efficiently Collecting Debtors
By Maurice Smith*
Like a trip to the doctor or dentist, analysing a list of debtors is often treated like one of those tasks that you know will be good for you but you keep finding reasons to defer.
It need not be like that. You have limited time to manage your debtors and you know that if you don't then your cash flow may dry up. Your firm should not be financing your clients at a zero interest rate.
How do you get the maximum bang for the time you invest in managing debtors?
First clear the decks
Before you can analyse your debtors, you need to be certain that all receipts of incoming payments have been recorded and that all invoices sent to your clients have been finalised in the accounting system.
You are now ready to go
Your accounting system probably allows you to print a debtors report in certain ways: for example, in LEAP Accounting you can print a Debtors Report that has the data sorted and grouped in a variety of combinations but you can't do much else with it other than print it or view it on the screen.
Use the Invoices Report instead but select only those invoices with an amount outstanding and send it to Excel. Invoices with an amount outstanding are known as open invoices. The reason for sending them to Excel is that you can use Excel's tools to sort, filter or otherwise manipulate the data.
The key is to use the right reports
You need to be able to sort your debtors by whoever has the carriage of the matter and then sort by the amounts due in descending order. If you focus on responsibility for the client and the high value amounts you will maximise your efficiency in managing your debtors. A high value debtor is probably worth a five minute phone call, while a low value debtor usually merits only a statement with an appropriate "pay up" reminder. The definition of "high value" is whatever is appropriate to your practice. For one practice it might be $500, while for another practice it might be $5,000.
Here is what I have setup for some of my LEAP Accounting clients:
• A weekly summary report of high value open invoices sorted by fee earner or by person acting, i.e. open invoices over a certain value and the total of those high value debts Download sample report
• A weekly summary of all debtors (using Invoices Report if using LEAP Accounting) sorted in descending order of balance due, identifying what % each balance represents of the total debtors. You can do this analysis on a firm wide basis or by responsible person. This analysis will almost certainly identify for you that 20% of your open invoices represent about 80% of the total. Download sample report
Action
Time spent managing your high value debtors is time well spent. Reducing the number and value of your high value debtors means money in your bank account. A strong focus should be on debtors in the 90+ day ageing. If you always have 50% or more of the value of your debtors in 90+ days you need to find out why this is happening.
Conclusion
It is impossible for you to comfortably meet your practice's financial commitments (such as salaries, super, overheads and drawings) if your clients are slow to pay or simply don't pay at all. Slow paying clients dry up your cash flow. The problem is compounded if your firm pays GST on an accruals basis.
A law firm with excellent cash flow management is a joy to work in, while the opposite is also true. Where does your firm sit?
You have limited time available to manage debtors. The good news is that with a small amount of training any competent accounts person can be taught to establish a system such as that outlined above. A weekly review of debtors balances and trends is a good investment of your time but you need to have the system in place first to make the process efficient.
*Maurice Smith is Director of Sydney Accounting & Consulting Services Pty Ltd. www.sydneyaccounting.com If you would like further details on systems for managing debtors or assistance with LEAP Accounting please email info@sydneyaccounting.com
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