The recent announcement by Dunn & Bradstreet, that ‘debtors’ days outstanding’ in Australia is now 55 days, highlights the problem that a large number of SMEs have in trying to effectively manage their cashflow.
One way for accountants to assist their client will be to undertake a due diligence review of the client’s debtors system, and if the client has not already implemented a debtors’ system manual to supply a debtors’ system manual for the client to use for their business.
A written system is probably not present in the vast majority of small businesses. Is this one of the reasons why debtors’ days outstanding are at a very high figure of 55 days?
An effective ‘debtors’ management system’ will include forms and procedures for:
- Credit application.
- A system for the receipt of and appropriate filing of director’s guarantee forms.
- Internal advice to sales department, specifying terms of trade, credit limit and any other special conditions that have been negotiated with the new customer.
- Procedures for registration of eligible debtors’ transactions on the Personal Properties Securities Register.
- Have your clients implemented a system for transactions that could be registered on a Personal Properties Securities Register, or do they still believe that Romalpa Clauses are effective?
‘New customer letter’ – SMEs should confirm in writing the terms and conditions of opening an account for a new customer, including:
- the terms of trade;
- credit limit; and
- confirm any particular requirements that the customer has relative to the information to be contained on the tax invoice, and the date by which they require the tax invoice each month, to ensure prompt processing and payment.
- Preparation of a ‘debtors’ aged analysis’ at the end of each reporting period, whether it be weekly or monthly.
- Calculation of ‘debtors’ days outstanding’ and comparing this figure to the business’ budgeted target and benchmarking comparisons with other similar businesses.
- ‘Debtors’ reduction checklist’ – does your client utilise a ‘debtors’ reduction checklist’ to identify key debtors that extra money needs to be received from, together with details of the progressive collections that have been made, so that the actual collections can be compared to the targeted collections?
- ‘Debtors’ management training program’ – is there an ongoing training system in place, that as new staff are appointed to your client’s business, the new team member can familiarise himself/herself with the debtors’ system of the business.
Debtors’ management is important because, in most businesses, debtors are a key component of cashflow management.
Peter Towers – Managing Director
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