What will happen if a business does not manage its debtors?

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When we start a business and start managing it, the sales may differ from time to time. A part of this fluctuation in sales may be because of a few instances. There are many people that need to pay their due money to the organization. We call people or businesses who owe you or your organization as debtors.

Efficient management of your debtors will help you get paid faster and prevent bad debts, where the debtor can’t afford to pay back your company. Consistent collection of debtors’ accounts will also help you maintain regular cash flow.

But when the number of debtors and the amount to be collected is very large, it’s difficult to collect money efficiently and at a regular time which can increase sales but will hinder the cash flow of the organisation.

We refer to managing debtors as credit management and includes:

Collecting debts regularly
Setting credit limits and payment conditions
making credit applications and regular credit checks
Establishing a clear credit policy

However, if the credit management of an organization is poor, it can often lead to a decrease in sales. If the customer cannot meet the deadlines for payment, the organization sends multiple emails or makes multiple phone calls. They do this in hopes to maintain their regular cash flow. But in these cases, instead of the debtor paying his/her due on time, the customer feels harassed. Hence, they will be more reluctant to do business with the organization the next time, which will hinder sales.

Therefore, it is very important to have an efficient credit management system in an organization. Debt management also includes keeping debtor records – this is a legal tax requirement. There are also laws governing how you may follow up debts with your customers. This gives an organization limited room to act upon while collecting their debt.

Hence, the solution to all these conditions regarding debtor management would be to reduce the number of debtors in an organization. Reducing the number of debtors but increasing the business that a company does with these few regular debtors is more efficient. It is a way to handle and keep a track on the cash flow of an organization.

Some companies to make it easier to manage their debtors try to reduce the bills receivables that a company gains even though they’re an added asset to the organization.

The company keeps a regular track of the customers and debtors that they do business with. To increase their sales and to maintain a regular cash flow in the company, we advise maintaining sales without credit. This will allow a company to keep a track on the complete transaction of a debtor instead of the irregularities in payment and withdrawal.