How to reduce debtor days: approve 60-day terms like a bank

To reduce debtor days in South Africa, decide the term before the first order, the way a bank decides a loan. Take a credit application, set a limit, price the term into the quote at prime, write the rule that stops orders at the limit, and set a review date. It takes an hour per customer.

The framing comes from an unlikely place. In an Infrastructure News interview, Lulapay's vice president, Jordan Gosling, puts it plainly.

"When a supplier delivers goods or services today but agrees to receive payment in 30, 60 or 90 days, it is extending credit."

A bank assesses the borrower, prices the risk and sets conditions, while a supplier "rarely has this level of freedom". Lulapay sells funding against this problem, so read the piece with that in mind. The point about credit stands regardless.

Before you start

• Your current funding rate: the overdraft or facility rate on the latest bank statement. Prime is the floor, not your rate.
• The customer's expected monthly spend and the term they are asking for.
• One person, not the salesperson, who approves terms.

Step 1: Take a credit application

One page, signed by someone authorised to bind the customer. It asks for the registered name, CIPC registration number, trading and delivery addresses, directors, bank details, two trade references, the term requested and the limit requested. A customer that will not fill in a page is telling you how the first dispute will go.

Step 2: Check what they told you

Phone both trade references and ask two questions: what limit do you give them, and do they pay on time. Check the company's status on CIPC. If they already buy from you on cash, their payment history with you is the best reference you have.

Step 3: Price the term at your rate

The customer's term is a loan. The Reserve Bank raised the repo rate to 7.25% from 25 September, which took prime to 10.75%, so that is the least it costs you. On a R200 000 order at prime:

• 30 days costs R1 767.
• 60 days costs R3 534, or 1.77% of the order.
• 90 days costs R5 301, or 2.65%.

On a 20% gross margin, that 90-day term takes 13% of your profit on the order. Use your own overdraft rate, which will be higher.

Step 4: How to reduce debtor days: set the limit from the term

The limit follows from spend and term. A customer buying R100 000 a month on 60 days will owe you about R200 000 at any time, plus the current month's orders. So a limit of R300 000 fits the term they asked for. A limit set by feel will be too low for the good customer and too high for the bad one.

Step 5: Put the term's cost into the quote

Either the price carries the cost of the term, or the customer is offered a lower price for shorter terms. Write it on the quote as its own line or its own price column. When the customer asks for 90 days, you are now negotiating a number, not a favour.

Step 6: Write the stop rule

Two conditions stop an order from being released: the balance would go over the limit, or any invoice is past its term by more than an agreed number of days. Name the one person who can override, and require a written reason. A rule anybody can override is a suggestion.

Step 7: Record it where the invoice is raised

The term, the limit, the approver and the review date belong on the customer record in the accounting system, not in an email thread. Check what your package can hold. Where it has no field for the limit, note it on the customer record and keep the application with it.

Step 8: Set the review date

Six months, or the first time an invoice runs late, whichever comes first. At the review the customer's actual payment days are compared with the term. A customer on 60 who pays at 85 is on 85, and the price should say so.

What breaks here

The limit sales overrides. The salesperson is paid on the order, not on the collection. That is why Step 6 names someone else.

Terms granted by email. "Sure, 90 days is fine" in a reply is an agreement nobody else can see. If it is not on the customer record, it was not approved.

The customer too big to say no to. You may still accept 90 days. The difference is that you know it costs R5 301 per R200 000, and it is on the quote.

Waiting for the law. Infrastructure News describes a debate about legislating against late payment. No bill is named, so plan as though nothing changes.

When this stops being enough

With twenty customers on terms, a Sheet and a disciplined approver hold this together. With two hundred, the limit, the balance and the stop rule live in three places. An order ships because the person releasing it could not see the balance.

The connected version is a customer record that holds the limit, the balance and the stop together, checked when the order is captured. The same record feeds the quote that prices the term. Zorah builds that on top of the accounting package a supplier already runs, rather than replacing it.

On Monday, list your five largest customers on terms. For each, write down who approved the term, the limit and the review date. Any blank is a loan you made without deciding to.