The Danger of Direct Debits

10th May 2016
Several years ago, a regional UK newspaper suffering a sharp drop in readership undertook a complete review of its finances.
To the management’s horror, they discovered that they had been paying several stringers and freelancers a monthly retainer, even though they hadn’t filed a story in over 30 years (!).

Yet in three decades, no one had noticed.

As this horror story shows, putting payments on autopilot is a double-edged sword. On the one hand, it simplifies your expenses. But on the other hand, when it’s not managed properly, it can cause an incredible waste of money and contribute to serious cashflow problems.

As your business grows, you may well set up various forms of payments through direct debits – everything from rent, utilities and insurance to trade paper subscriptions and so on.

These direct debits might have been set up by various people at different times, so it’s not uncommon for a business to be uncertain about exactly what it is paying out.

Even worse, even if the payments are warranted, what seemed like a good deal several years ago may be expensive now. But with direct debits, payments can continue for years before anyone reviews the price you’re paying.

The biggest obstacle to getting these payments under control is simple inertia – “we’ve always done it this way”. But if you are looking to grow your business, it’s important to manage your accounts more proactively.

Start by regularly auditing all your direct debits. Draw up a comprehensive list of what’s going out and what on. Always ask yourself whether this is something you still need in your business. In many cases it’s an expenditure which was important in your early days, but has become much less relevant over time.

Once you’ve sorted out the waste, look at your direct debits and see if you can get these products or services cheaper another way. Many businesses stick with the same supplier for things such as utilities, but if you spend a little time browsing the market, you might be able to get it cheaper elsewhere.

These savings may be small on their own, but like the expenses, they can add up pretty quickly.

If you find yourself wading through a huge amount of outdated direct debits, it is a sign that your accounts are in pretty bad shape. Your business will find it hard to grow to its full potential and make maximum profit if your expenses are shrouded in mystery – and if you are regularly overpaying for products and services.

So make this an annual exercise!

Not quite sure what your own business is spending its money on? Want help sorting out your accounts? Get in touch and let’s talk. Not only will you see exactly where you can save money, we’ll put in place processes to make sure there is never any confusion again.

Garry Mumford is author of the free guide, The 5-Step Process To Get Your Customers to Pay on Time, Every Time. He is founder and Director of Insight Associates, which since 1992 has been providing owner managed businesses with the financial insight essential for development and growth.

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