Effective management of sundry debtors supports businesses of all sizes to achieve financial stability, in order to pay off their debts or liabilities. This not only increases the value of your organization but also helps you to build cash liquidity.
However, to achieve this you must maintain a healthy cash inflow system which broadly consists of two parts - cash sales and cash from sundry debtors. Cash sales aren't usually a large part of your cash inflow and therefore don't affect your liquidity position that much.
That isn't the case with sundry debtors as they make up for most of your cash inflow system. And managing this entire piece is what tends to get complicated as your business grows. This is why sundry debtors management systems were created. In this blog, we will deep dive into this subject and learn about all the various facets of the sundry debtors process.
What Are Sundry Debtors?
Sundry debtors are all individuals, businesses, firms, or companies who receive a product or service from another business or company without making an immediate payment. Instead, it is done on a credit basis and they are liable to pay the business in the future. Sundry debtors promise to clear their outstanding dues to the company in the near future.
Sundry creditors, on the other hand, are those who provide goods or services to a business on credit and are liable to receive the payment from the business in the future. That's the primary difference between sundry debtors and sundry creditors and they are basically two sides of the same coin.
Sundry Debtors Example
Now, let's look at an example of how the process of sundry debtors occurs. Mr. A is a business owner who operates in the printing industry. He now requires printing ink that he orders from Mr. B's shop. He places his order and initiates the transaction with Mr. B. But instead of making an upfront payment, he promises Mr. B that he will make the payment within 15 days from the date of purchase. Now as Mr. B accepts Mr. A's payment terms, the entire transaction between them stands to exist and therefore, gets completed. Now, instead of receiving a cash payment which would be a current asset, Mr. A becomes an active debtor to Mr. B's business. A group of such debtors is collectively referred to as sundry debtors.
What Is Accounts Receivable?
Accounts receivable, also known as AR, are the sum total of money for goods or services delivered or used that are yet to be paid for by the various customers. All these pending dues are considered current assets in sundry debtors in balance sheet. All orders made on credit by customers come under AR.
Businesses usually record accounts receivable as assets in their balance sheets as the customer is legally bound to pay the debt. This makes sundry debtor account receivable liquid assets that can be used as collateral in case the business is looking to secure a loan to fulfill short-term obligations. Accounts receivable need to be cleared within a year and are therefore considered current assets.
What Is Sundry Debtors Management?
Sundry debtors management is a process using which companies make their investment and strategic financial decisions when it comes to all their sundry debtors. The entire process is centered around the collection of pending payments from all the various sundry debtors. Another important part of this process is setting up the payment terms and credit policies for future dealings with your customers.
This is an extremely important process as it directly affects your liquidity and cash inflow. Errors and inefficiencies in this process could end up impacting your business negatively so it's best to ensure that there are no cracks in your sundry debtors process.
Why Is Sundry Debtors Management Important?
Before we get into understanding the importance of sundry debtors management, let's take a quick look at the concept of working capital and how it works. The working capital of an organization is a direct reflection of its liquidity and is calculated using the below formula:
Working Capital = Current Assets - Current Liabilities
If your business has surplus working capital (as it should) it will be able to easily pay for its operating expenses. However, if you do not have surplus working capital, you will struggle to meet your daily operating expenses or pay off your creditors, which could result in you going bankrupt.
The following reasons highlight why sundry debtors management is important:
Maintaining steady cashflow:
Your cashflow is one of the most important factors that helps your business run smoothly on a day-to-day basis. It aids your working capital by regularly adding cash that enables you take care of your daily operational expenses.
There are two sources of funds that you have coming into your business - cash sales and cash that is received from your debtors. The latter usually makes up for much larger sums of money and therefore is very important. And this is where sundry debtors Management comes into play, helping you to streamline your cashflow.
Sundry debtor's payment tracking:
When you have a long list of sundry debtors who owe you money, it tends to get slightly difficult to keep an eye on who has paid up and who hasn't. This is where sundry debtors management can help you ascertain who owes you money and when they need to pay you.
If a particular debtor does not pay you in time, there's an interest component that comes into play. This is where the sundry debtors management system greatly helps you. Having such a system in place provides you with real-time information on the amount of money you are supposed to receive and hence, it helps you keep your working capital in check as well.
Periodic follow-ups:
If a certain debtor has defaulted on the payment terms that were previously agreed upon, the software starts sending the debtor a bunch of follow-ups via phone calls and emails, urging them to clear their dues at the earliest in order to avoid relooking at the credit arrangement altogether.
This system collects and sorts all the data regarding each of your sundry debtors and helps you navigate what action you need to take to best safeguard your company and cash inflow.
Identification of bad debts:
Bad debts are basically expenses that debtors of a certain business aren't able to pay and so, they become uncollectible which is ultimately a loss for your business. The sundry debtors management system collects all such information for you in a structured manner and then allows you to decide how you'd like to proceed to mitigate the damage in the best possible way.
Formulating terms of payment and credit policies:
This is another very important piece of the puzzle as it helps you minimize your losses when dealing with other companies or businesses. It also helps you to get complete clarity on the interest terms on late payments, discount options, and cheque dishonor-related fines.
The depiction of these terms on all invoices makes it a legally bound agreement between both parties. This will greatly help you formulate your credit policies and credit collection guidelines with your various sundry debtors. You will also be able to decide on which terms and policies should be assigned to whom, based on the data that the software gives you, which enables you to make more informed decisions.
How to Implement Sundry Debtors Management?
There are two ways in which you can implement the sundry debtors management system in your organization. One is the traditional or manual approach. Here, you will be doing everything manually and will have to appoint employees to be in charge of the various parts of the process. Be it the collection of data to the preparation of reports, all of this is done manually and on paper. This approach used to work in the past but is a fairly resource-intensive process that is prone to human error.
The second approach is using software that fully automates the sundry debtors management process for you. This system allows you to have access to real-time information, various templates for follow-ups and also helps you store all contracts and agreements in one place. You can also keep a close eye on all your overdue amounts and set automated reminders for when you need to check in with a particular debtor on a due payment. This system is highly beneficial when you're growing steadily and want to have a system that guarantees zero error.
Automate Your Sundry Debtor Management System With TranZact
If you opt for the traditional manual approach, whether you're a small or large company, you will probably face difficulties at some point. Not only is it a much longer and time-intensive process, but a small input error could really set you back.
Using modern-day sundry debtor management software to fully automate this process is definitely the way forward. Not only will it save you a great amount of time, but it will also allow you to view your data in a far more simplified and user-friendly manner. You must analyze all your needs based on factors like company size and the nature of your business and accordingly pick the software that is best suited for your business.
One tool that you could use to fully automate your sundry debtors management process along with many other production and inventory processes, is TranZact. It provides a comprehensive digital solution to fully digitize various business processes for SMEs. Everything from customer inquiry to product dispatch is taken care of. It also provides you with Business Intelligence dashboards and several other data metrics that will greatly help you make well-informed data-driven decisions!
FAQs on Sundry Debtors
1. What is the difference between sundry debtors and sundry creditors?
Sundry debtors are those who owe money to a business. And sundry creditors are those parties to whom a business owes money.
2. Is sundry debtors an asset?
Since the money given on credit is expected to be returned or the goods sold on credit are expected to be paid for, sundry debtors are considered to be fixed assets.
