Debts can have a serious impact on a company’s cash flow, possibly affecting your relationship with your suppliers if you have insufficient funds. Cash flow is a culmination of income and expenditure, and bad debts can upset the balance of the two. Most companies will experience a late payer or someone who refuses to pay, but taking steps to avoid bad debts occurring initially will help to prevent problems at a later date.
Terms and conditions
For a start, making the payment terms clear from the outset may help to reduce problems. Consult with your management accountants so that you produce clear, easy to understand terms and conditions that outline the terms of trade. Make the terms available on your website and on the invoices, so that customers have plenty of opportunity to read them. Ask customers to inform you of any problems that may affect payment as soon as possible to avoid delay. If you do incur late payment of invoices, you have a statutory right to add interest to outstanding payments.
Credit control
Set up a credit control team that will perform credit checks on clients, perhaps when the invoice is above a specified limit. Rather than supply products or services on unlimited credit, set a limit on the amount that may be borrowed, so that your losses do not become unmanageable. If you have new customers, set a credit limit until you are confident that they will pay in a timely manner. However, when you raise the credit limit, be aware that problems can affect anyone and payment problems could still occur.
Dealing with invoices
Send out the invoice to a client immediately, making sure that they have gone to the correct recipient. State payment terms, payment methods and a due date clearly on the invoice, so that there is no confusion about how or when to pay. If a payment is missed, start collection proceedings immediately, increasing the chances of obtaining payment. Rather than send letters to your client, phone them first, as speaking to a person sometimes has better results.
Stopping credit
If a client is a regular late payer, you could consider placing a temporary hold on their credit until all invoices have been settled. If you disrupt their business, they may be more likely to pay punctually in future.
There are many ways to ensure that bad debts are minimised, thereby reducing problems for your business. If you would like to discuss other methods of avoiding bad debts, please call us for an informal chat.