How you can use payment behaviour to detect debtor risk

There's a lot to think about and stress about when it comes to your business' cash flow and overdue invoices. What is an overdue invoice and when is it really overdue? Is the payment late based on your terms, or the terms of your client or customer? Have you considered their payment behaviour? How long will you wait before worrying that your client will never pay?‍

XBert alerts you when an overdue invoice is outside the average payment behaviour of your client or customer. This could mean the invoice hasn't been received, has gone unnoticed, or that your client is under financial strain. Late payments – just a hassle or more? Overdue invoices cost small businesses a lot. Of course, there's the hassle of chasing payment and sometimes chasing again, and again. That's time better spent elsewhere.

If you're a bookkeeper dealing with hundreds of client invoices each day, tracking and chasing late payments can be a big chunk out of your workday. However, the most significant impact of overdue invoices is on cash flow. When you're short of cash, you can't invest in any growth opportunities that arise. You have bills, suppliers, and wages to pay as well. Perhaps you need to purchase new equipment, are about to start a major project and need money to hit your bank account on time. You could also be absorbing additional interest charges because you're unable to meet loan or debt repayments.

Why, oh why are they overdue? Is there debtor risk here?

There are many reasons why people don't pay invoices on time. One of the most common reasons is the difference in trade terms. Your terms may require payment by 14 days, but your client or customer works on a 30-day basis. They may have several people and an approval process invoices need to pass through before payments are made. If you're a small business dealing with a large business, you won't have much luck getting them to meet your terms or speed up their process. Your contact record for this customer or client could be outdated or incorrect, so invoices get sent to the wrong person or the wrong address. We cover that in more detail here. You're flat out, and your client or customer probably is too. The books and accounts could be next on their To-Do list. Perhaps they are waiting on payments from others before they have the money to pay you. Or, your client could be in financial trouble. You've been dealing with them for years, and they've always made payments on time.

It's time to look at behaviour

In business, there will always be overdue invoices. You, a colleague, or your bookkeeper can waste time following up overdue invoices unnecessarily because that client or customer actually has no intention of paying for another 14 days. Whether an invoice is overdue because of a difference in payment terms, your client's or customer's system of payment, incorrect contact records, or they have too much else to do, you need to start worrying when things change. The real issue is when the behaviour of the client or customer paying is unusual. It could indicate a serious debtor risk. For example, on average City Transport Services pay five days after the payment date on your invoice. It's been eight days and still no payment. There may be an issue with City Transport Service's cash flow, or perhaps your invoice didn't reach them in the first place. Monitoring payment behaviour is crucial to understanding your business and those of your clients and customers. For consistently late payers, you can use this knowledge to revise their payment terms and reduce the invoice length or require a proportion upfront. Perhaps you need to reconsider continuing to trade with them.If you are alerted when an overdue invoice is outside average behaviour, you know this debtor risk is real, and you should chase payment as a priority.

XBert in action

Instead of telling you an invoice is overdue based on the due date, XBert analyses payment behaviour to provide you with a smarter debtor risk alert. You'll get an alert if an overdue invoice hasn't been paid after the average number of days your client or customer usually pays. New contacts won't have sufficient data to detect a pattern, so XBert will use your debtor days ratio, which is the average time that all your contacts usually pay.

Based on past payment behaviour you should chase payment for these overdue invoices as a priority because the amount owing is more at-risk. Any further delay in payment or chance of non-payment could significantly impact your business. XBert advises you to ensure your bank reconciliation is up-to-date to confirm any credit from this client or customer has not been missed. Then you can request payment or a commitment to pay. If payment can't be made in full, you could request part payment. Review payment terms regularly and if a client or customer is consistently late, consider reducing the payment terms on their invoices or taking payment or part-payment upfront.

Peace of mind and better credit management

XBert alerts you when an overdue invoice is outside average behaviour for that particular client or customer and becomes a debtor risk. You contacted City Transport Services, learned they had a particularly busy month and are behind in their accounts. They apologise and will process the payment today. Phew, nothing to worry about. XBert is continually calculating and adjusting the averages to reflect recent payment terms, so the alert will adapt according to updated patterns. Knowing payment behaviour and acting on it helps you understand your business and make informed decisions. Overdue invoices outside average behaviour and debtor risks are just some of the many risks XBert will find reviewing your accounting data multiple times a day. Using sophisticated algorithms, predictive analytics, and machine learning, XBert is there to detect business risks, saving you time and money.

XBert is an easy-to-use, powerful Xero add-on for business owners, finance teams, bookkeepers and accountants to stay a step ahead in business.If you're serious about business success, sync your accounting data with XBert. In minutes, you'll know the amount of money at risk and how to prevent losing it.

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