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Running a business is hard work and staying financial astute, even harder. How can a business avoid getting into a spiral of bad debt?
Bad debt for a business could mean that a customer hasn’t paid for the product or services you’ve provided. This is money that will be simply written off in our financial books. When this occurs too many times, higher levels of debt accrue and business suffers. Bad debt can have a number of negative impacts on a business, such as :
- Causing a decrease in the amount of available cash for everyday running of the business.
- Affecting the business’ ability to pay its own creditors.
- Creating an image of being in a state of disorder in the community, as well as to customers and employees.
- Severely impeding any plans for the growth of the business.
- Increasing the risk of insolvency should bad debt levels remain high. For advice from Cheltenham accountants, visit a site like https://www.randall-payne.co.uk
The best way to avoid this kind of debt situation is to not let it build up in the first place. Here are some steps in preventing bad debt:
- Create strong policies around the management of credit. Put effective control systems and procedures in place, particularly in dealing with new customers but apply to existing customers as well.
- Run a credit check on new customers before offering any type of credit. Such checks can easily be completed online. References can also be sought, whether bank or trade.
- If offering credit, have a solid limit in place to reduce the risk of heavy losses. A limit can always be extended should there be no problems but the starting point should always include a limit, especially for new customers.
- Any business documentation should have these terms and conditions clearly stated on them. This could include details on charges for late payment, exact timings when invoices are due and any other trading conditions.
- As soon as a payment becomes overdue, chase it up. This must be followed up by written reminders, emails and phone calls. Demonstrate your determination to recover what you are owed. This sends a clear message that you mean business!
- To improve your chance of receiving payment with no issues, find out when the customer does their payment run. If you could align your invoicing with this date then chances of a smoother transaction are increased.
- If you’re having problems, try the personal touch. Find out the best contact and give them a phone call. A simple chat can often identify any issues and also provide clues as to the financial situation of the debtor. The personal touch can often reveal information you might otherwise not be privy to by sending letters or emails.
- Be efficient with your invoicing system. Send them out as soon as products or services have been provided. By leaving invoicing until the end of the month, you could be setting up unnecessary delays that give the impression that payment is not a matter of urgency.