The influence of debtors payment behavior' on your company
“My debtors always pay” is a frequently heard statement by entrepreneurs. Yet the reality is a bit more stubborn. Debtors do not always pay on time.
The lack of incoming payments can be disastrous for a company's cash flow. After all, salaries, creditors and rent must also be paid. In an ideal world, invoices are always paid within the payment term. A sent (correct) invoice reflects the agreements made between the parties. Unfortunately, not every debtor adheres to the agreements made, incidentally or structurally. And it pays off as an entrepreneur to pay attention not only to incidental late payments, but also to payment behavior patterns.
What does the payment behavior say about a debtor?
There is interesting information hidden in the payment behavior of your debtors. A distinction must be made here between payment behavior and the change in payment behaviour.
The payment behavior indicates within how many days, before or after the due date of an invoice, the debtor pays. For example, if the debtor has a payment record of plus 14 days, this means that the debtor pays the invoice on average 14 days after the due date. This may be due, among other things, to the fact that the debtor uses its own terms and conditions, which state a different payment term than your own terms and conditions.
The derivative of the payment behavior is the change in payment behaviour. If the aforementioned debtor always pays 14 days after due date, then the change in payment behavior is zero. Although the debtor pays too late, the behavior is consistent. This is an indication of good internal processes and a stable financial position. However, it is also possible that the debtor pays at different times each time. This increases the change in payment behavior. An increased change in payment behavior is an indicator of a higher risk for this debtor. Paying every time at different times can be the result of a shortage of financial resources or poor internal processes.
What is the influence of unpredictable payers?
Based on your liquidity forecast, you can predict what cash flows will go in and out of the company each month. If less comes in, this has consequences for the outgoing payments. It is therefore very important for you as an entrepreneur to carefully monitor the payment behavior of your debtors, so that you are not faced with any surprises.
What can you do about it?
When entering into contracts with debtors, it is very important to also record the invoicing and payment: at what times can invoices be made, and at what time is payment subsequently made. Clear and explicit coordination in advance can prevent many annoyances and hindrance later in the process. Explicit coordination also makes it easier to refer to agreements made later if you need to remind your debtor.
Another option may be to pre-finance (factor) your invoices. This already brings out a large part of the liquidity that is tied up in invoices, and therefore also the pressure on your cash flow. The late and/or unpredictable payment of debtors then has a smaller influence on your cash flow, because you have already received a large part of the pre-financing.