Cash is king image to represent the importance of cash flow in your business
Category: Expert Opinion
Topic: Accounting

How Direct Debits can help your business with its cash flow

Business owners are feeling the strain from the rising cost of living, uncertain financial markets and the need for competitive staff retention packages due to the skills shortages, so realising cash and ensuring clients pay in a timely manner is more important now than ever before.

It’s not only the financial strain being felt by business owners and senior managers, there is also the impact on mental health to consider, by encouraging customers to set up a Direct Debit and improving cash flow takes away one of the uncertainties that can lead to sleepless nights.

What is a Direct Debit?

Put simply a Direct Debit is an instruction from a customer to their bank or building society which authorises the service user to collect varying amounts from their bank account on an agreed frequency, as long as the customer has been given advance notice of the collection details and is advised of any future changes.

How Direct Debit helps with your business cash flow:

  1. Regular invoicing with a Direct Debit authority can allow you to be paid for services as you go, rather than building up all the work in progress, carrying all the risk, then billing once the work is complete and waiting for a client to pay when they are ready.
  2. Direct Debit also helps to cut down the risk of bad debts, since the longer you are owed, the harder debt is to collect and the more time consuming it will become.
  3. One of the biggest advantages is that by automating the process, there’s no need to approve invoices or authorise payments, as funds automatically leave the customer’s account helping businesses speed up their cash collection.
  4. Direct Debit allows cash flow to be forecasted more accurately, greatly reducing the likelihood of errors and cash flow issues within the business.
  5. When compared to other payment methods, Direct Debit can cut costs because you don’t have to wait a number of days for the payment to clear and for the funds to be available in your account, e.g. waiting for a cheque to clear.
  6. If you use cloud based software, you also don’t need to the spend time to reconcile each collection manually.
  7. Setting up a Direct Debit system is easy, you just need to ensure you have a secure system and you understand the rules around how you take payments from customers and submit them to BACS for processing.

Direct Debit works well for the customer too, saving them time and effort.

Some of our clients pay equal Direct Debit instalments for the work agreed upfront when they come on board, whilst for others the amount taken varies as and when the work is completed throughout the year.

We use Xero to invoice our clients automatically via email, offering card payments as well as Direct Debit, with a link to pay by card online to take care of the transaction easily and securely. Once paid this automatically updates the client account on Xero. If we do receive payment by cheque, technology now allows us to scan it and deposit the cheque online.

Gone are the days of having to raise a manual invoice, spend time and money to post it out, following up with statements, writing letters, and going to the bank to pay in cheques (if you can find one!)

If you are a client and not on Direct Debit with us, give your usual contact call to discuss setting one up or explore your options on 01242 776000.