In the vast world of finance and accounting, some terms may seem obscure to the uninitiated.
Among them, the term "debtor" is one of the pillars of a company's financial management.
But what exactly is a debtor?
And why is it so crucial to a company's cash flow and balance sheet?
If you're asking yourself these questions, you've come to the right place. 💡
In this article, we'll break down the concept of debtor, place it in its proper context and explore its essential role in the day-to-day running of business.
Whether you're a budding entrepreneur, a student of finance or simply curious about the economic world, let's dive into the world of debtors together. 👇
What is a debtor in simple terms?
A debtor, in simple terms, is a person or company that owes money to another company.
Imagine a small bakery that orders 100$ Canadian flour from a supplier, but doesn't pay right away.
Until it pays this invoice, the bakery is considered a "debtor" to the supplier, as it owes it money.
In this situation, the supplier is waiting to be paid, and is therefore the "creditor".
So whenever you hear "debtor" in the context of a company, think of it as the company that has a debt or owes money.
In our example, the bakery is the supplier's debtor.
How can you identify a "bad" debtor?
A "bad" debtor is someone who presents a high risk of not repaying the money they owe. To identify such a debtor, here are some signs to look out for:
❌ Payment history : If they have often paid late in the past, or have outstanding debts with others, this is a red flag.
❌ Precarious financial situation : If their finances are unstable, such as irregular income or high existing debt, they may find it difficult to pay.
❌ No warranties : If they can't offer a guarantee or bond, this may indicate a risk.
❌ Evasive answers: If they avoid your questions or give vague information about their ability to pay, be careful.
❌ Bad credit: A low credit rating or a history of bankruptcy can also indicate a bad debtor.
In short, a "bad" debtor shows signs of financial risk.
What are the risks associated with poor debtor management?
Accounts receivable management means making sure that people or companies who owe you money pay you on time.
If this is not done properly, several problems can arise:
🚨 Cash flow problems : If a lot of people owe you money and don't pay, you could run out of cash to run your business.
🚨 Financial losses : If some debtors never pay, you lose money.
🚨 Additional costs : Chasing late payments can cost time and money.
🚨 Tense relations : Payment disputes can damage your relationships with customers or suppliers.
🚨 Reputation : If you're always chasing money, it can damage your corporate image.
Poor accounts receivable management can therefore jeopardize a company's financial health and reputation.
10 techniques used to track and manage debtors effectively
Rigorous monitoring and effective management of accounts receivable are essential to a company's financial health.
Discover 10 tried-and-tested techniques for successfully doing so below. 👇
1️⃣ Computerized accounting systems
Computerized accounting systems are software programs designed to automate and facilitate a company's financial management.
They enable you to track amounts owed by debtors, send payment reminders, and obtain detailed reports on payment performance, all in an organized and efficient way.
2️⃣ Credit assessment
Credit assessment involves examining a customer's creditworthiness before granting terms of payment on credit.
By checking the customer's financial history, payment history and other indicators, companies can estimate the risk of non-payment and thus decide whether it is prudent to extend credit to this customer.
3️⃣ Clear terms and conditions
Clear terms and conditions define payment expectations and obligations between a company and its customer.
By clearly stipulating payment deadlines, any penalties and other terms, they eliminate ambiguities, make financial obligations easier to understand and promote timely payment.
4️⃣ Fast invoicing
Prompt invoicing means issuing invoices immediately after delivery of a service or product.
By sending invoices quickly, companies can speed up the payment process, reduce waiting times for funds, and minimize the risk of forgotten or disputed transactions.
5️⃣ Regular reminders
Regular reminders involve sending notifications to debtors to inform them of impending or overdue payments.
These reminders, whether automated or manual, encourage debtors to pay their debts on time, reducing late payments and optimizing the company's cash flow.
6️⃣ Cash flow planning
Cash flow planning is the art of forecasting and managing a company's cash inflows and outflows.
By anticipating expected debtor payments and upcoming expenses, companies can ensure financial equilibrium, avoid overdrafts and make informed decisions on investments or borrowing.
7️⃣ Incentive offers
Incentive offers are benefits or discounts offered to debtors to encourage prompt payment.
For example, a company might offer a discount for payments made within 10 days of invoicing.
These incentives motivate customers to pay their bills earlier, thus improving cash flow.
8️⃣ Using a collection agency
Calling in a collection agency comes into play when attempts to recover debts in-house fail.
These agencies specialize in recovering unpaid amounts, using legal methods and negotiation techniques.
They enable companies to concentrate on their core activities while recovering funds.
9️⃣ Regular analysis
Regular analysis involves periodically examining a company's debtor portfolio.
By assessing payment punctuality, outstanding amounts and trends, companies can identify potential problems, adapt their collection strategies and make informed decisions to minimize risk and optimize cash flow.
🔟 Payment agreements
Payment agreements are formalized arrangements between the company and the debtor to spread the repayment of a debt over a defined period.
Rather than requiring immediate payment in full, these agreements allow instalments to be paid in instalments, making it easier for the debtor to manage finances while ensuring a regular cash flow for the company.
As N. Séguin Syndic, we understand the crucial importance of effective accounts receivable management to your company's long-term success. ⚖️
Faced with complex financial situations, it is sometimes necessary to call on external expertise to guide your decisions and optimize your cash flow.
If you feel the need for professional guidance or have any questions about managing your debtors, please do not hesitate to Contact us. 📱
Our dedicated team is here to provide you with solutions tailored to your needs. Let's sail together towards financial stability and prosperity for your business.
