Why do small businesses need to integrate a direct debit system for payments? Will this system be instrumental to the success of small businesses?
One of the most common reasons a small business fails is the mismanagement of its finances. Not having enough money is the most significant risk for small businesses. Business owners need adequate funding for their day-to-day operations. Because of this, business owners should know how much revenue is being generated by the company daily. One of the reasons why a business does not have enough money is due to poor payment collection processes. Payments coming from customers are the primary source of revenue for most companies. When expected fees do not materialise, the results can be disastrous for the company.
Writing off bad debts is a bad idea, especially if your business is doing this too often. Customer debts that are not recovered are considered financial losses for your business. Having a lot of bad debts may cause the downfall of your company for the following reasons:
Reduced Profit Margins
If you have uncollected debts, the revenue that you were supposed to get from these debts is deducted from your sales revenue. If you keep on writing off bad debts or fail to collect customer payments, your business will sustain losses. It is, therefore, essential to improve your collection process to reduce losses from uncollected fees. One way of improving payment collection is by integrating a direct debit system within your company.
The Need to Integrate a Direct Debit System
Direct debit is a way of financially transacting between a company and its customers. Direct debit is an agreement between the two parties to automate payments based on an agreed amount on an agreed time. Payment collection through a direct debit system is highly advisable for businesses that rely on recurring payments from their customers. Examples of companies that can benefit from a direct debit system are companies that offer subscription services such as gyms and private schools.
A direct debit system can also be entered between a company that sells expensive products. Customers who may want your products but do not have enough money at the moment can either pay for a product on a lay-away scheme or through a direct debit agreement.
The Benefits of a Direct Debit System
A direct debit system will help improve the accounts receivables of your company. When your customers are enrolled in a direct debit system, you are significantly increasing your chances of getting paid by your recurring customers. You should keep in mind, however, that customers that have no bad intentions of not paying may find a way to circumvent paying even if they are in the direct debit system.
- Improved Cash Flow: It will be easier for your company to collect recurring payments from your customers. When your recurring customers are enrolled in a direct debit system, you will get a steady stream of revenues without having to go after hard to collect customers.
- Increase the Number of Customers: If your company sells expensive products, you are limiting the number of customers that can avail of your products if you stick to a cash-only basis. There may be a lot of customers that would want to purchase your products but do not have enough money to shell out for a one-time payment. When you have a direct debit system for payments, you can give customers options on paying for your products through terms.
Having a direct debit system for payments will allow your company to lessen bad debts. With bad debts out of the picture, your small business has one reason for failure that has been crossed-out.