Poor debtor management is one of the most common contributors to cash flow problems in Australian small business. A business can be genuinely profitable and still face a cash crisis because customers are slow to pay and the business does not have systems in place to accelerate collection.
Understanding your debtor days
Debtor days (also called days sales outstanding or DSO) measures how long it takes, on average, to collect payment after an invoice is issued:
Debtor days = (Accounts receivable balance / Annual sales) × 365
For example, if a business has $120,000 in outstanding receivables and $720,000 in annual sales: Debtor days = (120,000 / 720,000) × 365 = 60.8 days
Australian benchmarks vary by industry, but 30–45 days is typically achievable. Businesses operating at 60+ days are carrying a significant working capital cost.
The credit terms conversation
Most small business owners issue invoices with payment terms they have never explicitly discussed with their customers. The customer assumes 30 days; the business expects 14 days; neither has signed anything. The result is predictable.
Best practice:
- Establish written payment terms before the first invoice is issued
- Include terms on every invoice (due date, not just "net 30")
- For larger accounts, consider a credit application process and credit limit
A signed credit application is not bureaucratic overreach — it is a business document that gives you options if the debt becomes overdue.
The invoice accuracy requirement
An invoice that contains an error will be disputed and paid late. Common errors:
- Wrong purchase order number
- Incorrect quantity or pricing
- Missing information required by the customer's accounts payable system
- Sent to the wrong contact
Before a credit dispute process can begin, invoice accuracy must be locked down. For businesses that invoice large enterprises, understanding the customer's AP requirements and building them into the invoice template eliminates a common delay.
Follow-up systems
The biggest predictor of debtor days is whether the business follows up systematically. Businesses without a follow-up system wait until debtors become embarrassingly late before making contact.
A basic follow-up schedule:
- Day of due date: Automated reminder (most accounting platforms can send these)
- Day 7 post-due: Email or call from accounts staff
- Day 14 post-due: Formal overdue notice, escalation to account manager
- Day 30 post-due: Letter of demand, hold on further supply
- Day 45+ post-due: External collection or legal demand
The tone of the Day 7 contact matters. A polite, professional follow-up ("I wanted to check that Invoice #1234 for $4,500 had been received — it was due on [date]") is more effective than a curt demand.
Early payment incentives and late payment penalties
Early payment discounts (e.g., 2% discount if paid within 10 days) are effective for some industries and customer types. The cost of a 2% discount on a 30-day term is equivalent to approximately 24% annualised — significant, but worth it if it converts a 60-day debtor to a 10-day debtor for a key account.
Late payment fees (e.g., 2% per month) are less effective in practice because large customers simply ignore them, but they establish a legal right to claim costs if the debt eventually goes to court.
GST and bad debt write-offs
When a debt is written off as bad, the GST treatment depends on whether GST was already remitted:
- If the business is on a cash basis for GST, GST is only remitted when payment is received. A bad debt does not require a GST adjustment.
- If the business is on an accruals basis, GST was remitted when the invoice was issued. Writing off the debt allows a GST adjustment in the next BAS at label G18, recovering the GST component.
The ATO requires that a debt be genuinely bad (not just slow) and that the write-off be reflected in the accounts before the GST adjustment can be claimed.
Bookkeeping hygiene for debtors
- Reconcile the debtor ledger to the accounts receivable balance monthly
- Age the debtors weekly (current, 30 days, 60 days, 90+ days)
- Write off debts that are genuinely uncollectable in the period they become bad — do not carry uncollectable receivables on the balance sheet to make it look healthier
- Document all collection attempts for debts that may go to external collection or legal action
The aged debtors report is the single most useful report a bookkeeper can provide to a business owner for cash flow management. Providing it monthly — with commentary on any movement in the 60+ days category — is a high-value advisory service.