How to decrease Debtor Days and improve your firm’s cash flow

If your accounting practice has slow-paying customers and high debtor days, it’s not unique. Research has shown that the average debtor days for accounting firms is 53. In addition, average work-in-progress time is 24 days. This means that the average ‘lock-up’ is 77 days (Business Fitness, Good, Bad and Ugly of the Australian Accounting Profession, 2018). When you consider the cost of carrying accounts receivable – including finance, opportunity and administrative – accountants are losing substantial amounts of money due to late payments.

Why are debtor days so high for accounting firms?

Payments for accounting services can be seen as a ‘grudge payment’ – something that’s a necessary expense but doesn’t directly contribute to business growth. An invoice for accounting services might fall to the bottom of a business’ priority list when compared to other expenses, such as paying staff and rent. 

The high average debtor days figure points to the need for improvement in accounts receivable management. Despite their expertise in this area and helping their clients with this issue, many accounting firms are like the proverbial cobbler with bad shoes when it comes to staying on top of their accounts receivable. 

High debtor days result in cash flow challenges for accounting firms. Research conducted in 2020 revealed that cash flow is rated third in the top 5 challenges for accounting practices (Business Fitness, Good Bad Ugly, Insight Poll, 2021 rates, pricing & outlook, 2020). 

What can you do to decrease debtor days and improve cash flow?

Document credit policies and procedures

Clear credit policies and procedures will set the stage for lowering average debtor days and bad debts. Once a new client has been approved for invoice payment terms, clearly communicate these before beginning any work.   

Confirm fees upfront

Accountants have rated client fee resistance and sensitivity as their top challenge in 2020. One of the causes of late payments is misunderstandings about fees, so make sure clients understand these in advance. 

Invoice immediately when work is completed

After completing a project or reaching a milestone, billing immediately creates a sense of urgency and enables the client to connect the invoice to the work completed. Despite this fact, 13 per cent of accounting practices send invoices at the end of each month, regardless of when the work is completed. Delaying invoicing like this will automatically increase debtor days and decrease cash flow. 

Make it easy for clients to pay you

Making it easy to pay invoices will help to reduce debtor days. This includes offering several payment options, including bank transfers and credit cards. Make sure the amount, payment terms and payment options are clearly displayed on the invoice. Include contact details for clients to get in touch if they have any questions. 

Automate accounts receivable

Automating reminders for overdue invoices is a proactive step that will reduce debtor days. Research revealed that reminders are effective for getting invoices paid. One study found that 59 per cent of overdue invoices require three or more follow-ups before they’re settled. 

Offer flexible finance solutions

Many customers are slow payers because they are having cash flow challenges of their own. Research commissioned by Moula revealed that 64 per cent of SMEs would prefer the flexibility of paying for large business purchases over 12 months. 

Moula Pay is a smarter way to offer payment terms to your business clients. 

When clients pay with Moula Pay, your accounting practice gets paid upfront. Clients enjoy up to 12 months to pay, with the first 3 months interest and repayment-free. Become a Merchant today to free your practice from chasing invoices, reduce your debtor days, and outsource the risk of bad debts.

For more information on reducing debtor days, download our white paper – Decreasing debtor days: strategies for accounting practices. 

Written by:  Moula – Accountantsdaily