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The Horse Has Bolted!

resonate • Oct 29, 2015

The spring racing carnival is a time for plenty of fun and frivolity, hasty punting and hangovers, and sometimes even some madness! The letter I received from a debt collector recently certainly fell into the latter category.

Apparently they have been instructed to recover overdue fees for late returns on behalf of Video Ezy. Nothing too mad about that, except that the videos I allegedly returned late were hired more than three years ago!

How much chance do they realistically think they have of collecting debts that are three years old? If my memory serves me correctly I actually returned those videos on time, so if push comes to shove that’s the line I’ll be running.

The truth is that the horse has well and truly bolted by now. Debtors represent a huge part of what we refer to as business “lockup,” being that part of a business’ working capital that is “locked up.” The other major component being work-in-progress or inventory.

The most popular KPI for tracking the collection rate of debtors is Debtor Days – being the average number of days it takes to collect debtors. It is calculated using the following formula:

Source: Wikipedia

What should my debtor days be?

Well, as simple as it sounds – the lower the better. For a retail business this will generally be zero, and all sales are COD. Mining services companies are often stretched out to 55-60 days on the back of the clientele those businesses are servicing. Domestic tradespeople should target less than 14 days as a reasonable baseline.

How can I improve my debtor days?

The number one step in the process is to empower one person within the organisation to be responsible for collections. Ringing clients to request payment is a challenging task and not one that people readily volunteer for. Ensure you get the right person in the seat, somebody who can be sympathetic when required but firm and outcome-driven.

In addition, there are some other tools and tricks that can be used, such as:

  • Debtor Daddy ( https://debtordaddy.com )
  • Chaser ( https://www.chaser.io )
  • Ensure you have a credit application for new clients
  • Ensure your credit application has the ability to register an interest over any goods provided on the PPSR
  • Consider offering discounts for prompt payment if your cashflow is tight

For a business turning over $9m, with average debtors of $3.3m the debtor days work out around 83 days (which is poor). If the business is working on an EBIT percentage around 9-10% then a reduction in debtor days by 1 day will increase available cash by more than $40,000 . Improve that by 10 days and you will have an extra $400k in the account as working capital.

Whilst 83 days is not great, it sure is a damn sight better than Video Ezy, which is currently sitting at 1,188 days on my late fees.

The question on everyone’s lips – Happy Feet 2 was probably better than the original, Smurfs 3D was a let-down and 50/50 was falsely advertised as a comedy, it was anything but.

And no, I haven’t paid the bill.

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