What is days beyond terms and how can you reduce it?

Days beyond terms (DBT) is a commonly used business credit term that indicates how long a business has taken to pay its invoices beyond the agreed payment terms. Prompt payment of invoices is one of the biggest problems that SMEs face. Just over a half of UK SMEs have to wait 30 days or more beyond their agreed payment days for an invoice to be paid with some of the worst being up to 100 days(1). The knock on effect of this is that business owners have to make tough decisions to get through the month and it can making managing their cash flow difficult(2). The longer it takes for them to pay their bills to you, the more it’s costing you money and eroding into your profit margin. So what can you do to lower your DBT average?

1 See your total risk visibility

Before you can make an informed decision about which of your customers have been paying late and are more at risk of doing this in the future, you need to have an integrated view of all your accounts and ledgers. This will potentially make it easier for you to calculate their individual financial risk and analyse which accounts you should be focusing on. This is the first step to understanding the cost effects that late payments are having on your business and how you can tackle them in the future.

2 Monitor payment trends as they happen

A business with a DBT of 20 days can easily change to 30 days at any time, especially with how unpredictable the current economy is. It’s hard to forecast who’ll pay their invoices on time and who won’t unless there is a long standing trend. However, with on-going monitoring, you can have an overall view of your whole ledger and the overall DBT. This helps you to spot any accounts that are high risk to you so that you can prioritise the collection of these payments and minimise the potential costs to your business.

Days beyond terms

3 Risk score all your customers

Once you have a complete overview of your accounts and ledgers with an established DBT for each, you can begin risk scoring individual accounts. Their risk score takes into accounts lots of factors over time to give you a sound indication of their financial risk. By seeing the risk of every business, you can determine their financial stability over a 12-month period. This is a useful way to differentiate between those who have large debt with low risk or small debts with high risk, so you know which payments you should be chasing first.

4 Slice and dice your data

The ability to analyse your data in detail can make a significant difference on how much insight you can capture from your accounts and ledgers. Set up or sign up to bespoke systems like our Ledger Manager tool to do all the detailed analysis for you. Who is over their credit limit and what’s this month’s payment trends? You can see and organise accounts by specific items such as size of accounts, longest overdue accounts or those with the biggest DBT increase. This extra insight could help you to strengthen your decision making and credit risk management strategies.

5 Benchmark against your competitors

Once you have established payment trends for your account, the next step is to compare this with your peers. By seeing how businesses are paying you compared to other suppliers, you can start to negotiate better payment terms to suit you. Benchmarking your DBT against other creditors or suppliers could help you to uncover any trends in a certain industry or certain time of year.

The financial health and smooth running of cash flow is often dependent on that of its customers. Obtaining a comprehensive view of payment trends and risk behaviour across all your accounts can mean the difference between an increasing or decreasing DBT figure. Be in control of your DBT so that you can minimise the impact is has on your overall profit margin.

 

1 Telegraph; 2 Bacs; Experian