Managing Debtors: A South African SME Guide
Control your receivables and get paid faster. Learn credit control processes, collection strategies, legal options, and when to use debt collection agencies.
Introduction
Poor debtor management is one of the top reasons South African SMEs fail. When customers don't pay on time - or at all - your cash flow suffers, you can't pay suppliers, and the business spirals. This guide covers practical strategies for credit control, from preventing bad debts to collecting overdue payments legally and effectively.
Preventing Bad Debts
The best approach to debtor management is preventing problems before they occur. These preventive measures save significant time and money compared to chasing debts later.
Credit Application Process
- Require a written credit application for all new accounts
- Collect company registration details, VAT number, directors
- Request trade references (at least 2-3)
- Check credit bureau reports (TransUnion, Experian, XDS)
- Set appropriate credit limits based on findings
- Have customers sign your terms and conditions
Credit Application Must-Haves
- Full legal name and trading name
- Company registration number (if applicable)
- VAT registration number
- Physical and postal addresses
- Contact person for accounts
- Bank details
- Trade references (name, contact, account number)
- Consent to credit checks
- Signature of authorised person
- Personal suretyship clause (for companies)
Setting Credit Terms
Standard Payment Terms
- COD (Cash on Delivery): No credit risk, but may limit sales
- Net 7: Due within 7 days - good for regular, trusted customers
- Net 14: Two weeks - reasonable for most B2B transactions
- Net 30: Standard in many industries - watch cash flow impact
- Net 60/90: Only for strong relationships with large customers
Structuring Credit Limits
- New customers: Start with COD or small limits
- Review after 3-6 months of payment history
- Increase limits gradually based on payment behaviour
- Maximum limit based on customer's verified creditworthiness
- Review all limits annually
Early Payment Incentives
Offering discounts for early payment can dramatically improve cash flow:
- 2/10 Net 30: 2% discount if paid within 10 days, otherwise due in 30
- This equals 36% annual return for customers who take it
- Reduces your collection effort and risk
- State clearly on invoices and quotes
Monitoring Your Debtors
Debtors Age Analysis
Run a debtors age analysis weekly or at minimum monthly. This report shows who owes what and for how long:
- Current: Not yet due
- 30 days: 1-30 days overdue - first follow-up
- 60 days: 31-60 days overdue - escalate urgency
- 90 days: 61-90 days overdue - final notices
- 120+ days: High risk of write-off - consider legal action
Key Metrics to Track
- Days Sales Outstanding (DSO): Average days to collect payment
- Collection Effectiveness Index: % collected vs due
- Bad debt ratio: Write-offs as % of credit sales
- Overdue percentage: Overdue amount vs total debtors
- Target DSO: Match to your payment terms (e.g., 30 days for Net 30)
Example: R500,000 receivables, R1,500,000 sales over 90 days
DSO = (500,000 ÷ 1,500,000) × 90 = 30 days
Collection Process
Send invoice immediately upon delivery/service completion. Ensure it's sent to the correct person. Call to confirm receipt within 2-3 days.
Send a friendly payment reminder on the due date. 'Hi, just a reminder that invoice #123 is due today.' Many payments are simply forgotten.
Phone the accounts department. Confirm they have the invoice. Ask when payment is scheduled. Document the conversation and promised payment date.
Email stating the account is overdue. Reference your phone conversation. Request immediate payment or confirmed payment date. Copy a senior contact if available.
Send formal letter/email: 'Final Demand - Account Overdue'. State total amount, invoice details, and deadline (7 days). Mention that continued non-payment will result in account suspension and legal action.
Stop all further supply until payment or payment arrangement is in place. Notify the customer in writing. This often prompts immediate action.
Send formal legal letter of demand (yourself or via attorney). Give 7 days to pay. State that legal proceedings will follow. This is required before court action.
Hand over to attorney for summons or use a collection agency. Consider the cost vs debt value. Small claims court for amounts under R20,000.
Communication Templates
Friendly Reminder (Due Date)
Dear [Name],
This is a friendly reminder that invoice #[NUMBER] for R[AMOUNT] is due today, [DATE].
If you've already made payment, please disregard this message.
For your convenience, our banking details are: [BANK DETAILS] Reference: [INVOICE NUMBER]
Please let me know if you have any questions.
Kind regards,
[Your Name]
Final Demand (Day 30)
Dear [Name],
Despite previous reminders, invoice #[NUMBER] for R[AMOUNT], due on [DATE], remains unpaid. Your account is now [X] days overdue.
This is our final demand for payment before we take further action.
Please make payment within 7 days of this notice.
Failure to pay will result in: • Suspension of your account • Referral to our attorneys for legal action • Additional collection costs charged to your account
If you are experiencing difficulties, please contact us immediately to discuss a payment arrangement.
[Your Name]
[Company Name]
Legal Collection Options
Letter of Demand
Before taking legal action, you must send a formal letter of demand giving the debtor reasonable time to pay (usually 7-14 days).
- Can be sent by you or an attorney
- Must clearly state amount owed and reason
- Must give deadline for payment
- Must state intention to take legal action
- Keep proof of delivery (registered mail or email read receipt)
Small Claims Court
- Claims up to R20,000
- No attorneys allowed (you represent yourself)
- Filing fee: R60-R100
- Quick process (1-3 months)
- Judgment is legally enforceable
- Good for straightforward debt collection
Magistrate's Court
- Claims R20,001 - R400,000
- Attorneys recommended
- More formal process
- Legal costs recoverable from debtor
- Takes 3-12 months typically
Collection Agencies
- Hand over when internal efforts fail
- Typical fee: 10-25% of amount collected
- They have more resources for tracing and collection
- Choose registered, reputable agencies
- You can still maintain customer relationship for future
Writing Off Bad Debts
Sometimes, despite best efforts, debts are uncollectable. Write-offs should be a last resort, but when necessary, handle them correctly.
When to Write Off
- Customer is insolvent or liquidated
- Cost of collection exceeds debt value
- Debt is prescribed (3 years with no acknowledgment)
- Customer cannot be traced
- Multiple collection attempts have failed
Tax Treatment
- Bad debts can be claimed as tax deduction
- Debt must be actually written off in your books
- Must have been included in taxable income previously
- Keep records proving the debt and write-off reasons
- Partial write-offs also allowed for compromises
Tools and Systems
Accounting Software Features
- Automated invoicing and reminders
- Debtors age analysis reports
- Customer credit limit tracking
- Payment allocation and history
- Statement generation
- Integration with email for follow-ups
Credit Checking Services
- TransUnion: Commercial credit reports
- Experian: Business credit checks
- XDS: Cross-database credit information
- CIPC: Company registration and director checks
- Cost: R50-R200 per report
Best Practices Summary
- Never extend credit without written agreement and credit check
- Invoice immediately and confirm receipt
- Follow up on the due date, not after
- Document all communication
- Escalate consistently - don't let accounts age
- Stop supply before debts grow too large
- Use incentives (discounts) to encourage early payment
- Review debtors weekly and act on overdue accounts
- Know when to use legal options vs write off
- Learn from bad debts - improve your credit process
Next Steps
- Create or update your credit application form
- Define clear credit terms and limits for customer categories
- Set up debtors age analysis in your accounting system
- Create a collection calendar with defined actions at each stage
- Prepare email templates for each stage of follow-up
- Review current overdue accounts and start the collection process
- Consider credit insurance for large customer accounts