Your Business and Debtors

Debtors are customers who owe money to your business. A customer will purchase goods or services from you, and either pay you immediately - COD (cash on delivery) or offer to pay later. Even if you do not allow accounts, a customer is a debtor until he pays, even if it is later in the day or the following day. It is the business's job to collect that money as soon as possible.

A business will typically issue an invoice to its customers whenever the customer makes a purchase. It could be a cash sale slip, a hand written invoice from a pre-printed invoice book, or computer generated. Either way it is usually the only proof that the required goods or services have been supplied to the customer, and that the customer agrees to pay for those goods. When the customer pays, it is necessary to mark the invoice as being paid, or at worst that the debt is no longer owing. If a business has one invoice per day, it is usually easy for the owner to remember whether or not he has been paid. As the business get busier and invoices mount up, this task that seems so easy becomes impossible. This is often the start of the "admin nightmare" in a business. The business seems busy, but customers don't pay or don't pay on time and it is difficult to find out exactly how much they still owe the business, never mind the inter-personal difficulties of dealing with customers who are becoming bad debts.

We have come across many businesses that are unable to reprint an invoice, because the invoice was lost, or never saved on the computer. We have seen many businesses that are unable to give a summary of all amounts purchased, owed and paid - the common debtors statement. We have seen businesses where the system consists of two piles of invoices - the left-hand pile is the unpaid invoicess, and the right-hand pile is the paid invoices. What happens if a blast of wind blows the two piles into each other? Simple, the business closes because it is unable to collect monies owed.
Many customers, particularly large corporates and government institutions only pay on statement. Their own order form clearly states their terms as being 30, or 60 or even 90 days from date of statement. Unfortunately the business does not get around to issuing a statement. The invoice is hard enough to produce. The statement gets delayed for weeks or months or never gets produced! Never mind the terms clearly state that a statement must be supplied!

What is a statement?
A debtors' statement is a document summarising all amounts owing, itemised by date. It also lists all amounts paid, usually indicating which invoice was paid by which payment. This is known as the "open item" method of producing statements. If the amounts paid are not reconciled against specific invoices, the statement is known as "balance brought forward". It is usually preferable to use the open item method, as this shows the business owner exactly which invoice has been paid and which is still unpaid. If a particular invoice is not paid, at least the owner can ask the customer about that particular invoice and if he has a reason for not paying it.

Aging
A statement usually has an aging or age analysis or it. The aging analyses each outstanding amount and calculates for how long it has been unpaid. This is usually summarised into all amounts that have been unpaid for less than 30 days (sometimes known as current), amounts unpaid between 31 days and 60 days, 61 days and 90 days and over 90 days. As a general rule of thumb any debtor older than 30 days needs to be followed up and anything over 90 days (or three months) is a problem and about to be lost. This obviously depends on the credit terms advanced to the customer.
Another useful document is the Age Analysis for all customers. This document lists all customers, in a table format, and shows each customers aging. A total for each age category is then printed, summarising the entire business's situation. Again, the higher the number of days of debtors, the worse the situation.

How to calculate and produce a statement:
Use the following as an example: A customer purchases on 17th February. The full amount is R9800.00. Let us assume the customer has so far paid R4500.00 on 12th March 2005. The amount outstanding is therefore R5300.00 This is being written on 22nd March 2005, so the aging on this invoice is between 31 and 60 days, 33 days to be exact.
Let us assume the customer purchased additional goods on 18th February worth R2300.00. If he has not made any payments then this amount also falls into the 31-60 days aging.


The statement would show;

Aging:

       
                           

How to produce the Age Analysis:
The age analysis summarises each customer's aging and displays it in a table format.
Below is an example of an age analysis

Age Analysis for ABC as at 22nd March 2005-03-23

Company 

  
                             
                                 
                       

The bottom line is that you are owed R1910.00, of which R900 is current, R450 is over a month old, and R560.00 is over 2 months old. In this example nearly 30% of all debtors is over 2 months old. (R560 of R1910).

If this sounds complicated, it is not! However doing the job manually becomes quite tedious and is prone to error. It is too easy to forget to include an invoice, or exclude a payment. That is why it becomes essential to use a computerised system, such as our EconoAccounting, which does the job automatically.

Is it worth the initial expense and minimal effort to computerise? Well, decide for yourself and look at how much is outstanding, and how long the amounts have been owing.