Failing to keep accurate track of your accounts receivable (that is, debts others owe to your business) can have many negative effects on the health of your business. If you have cash tied up in unpaid debts, this can severely affect your own ability to pay debts to your creditors and suppliers, which can eventually damage your reputation and credit rating.
Cash flow concerns: this is perhaps the most immediate consequence of having customers who do not pay their debts to your business. We’ve all heard the saying ‘Cash is King’. A business needs a cash flow that is relatively stable and predictable. If this is absent, the business may find itself in a problematic situation. Longstanding cash flow problems have a significant financial impact upon businesses.
Good credit control: don’t be afraid to conduct credit checks on clients. These checks should be conducted before you provide any goods or services, because once the product has been consumed, your business is at a loss if they fail to pay. You will then need to devote time and energy into collecting these debts, so it is always better to be safe than sorry.
Good business practice: make a habit out of chasing up bad debts, even if they are only late by a few days. This does not mean that you have to be aggressive in your approach; a friendly but fi rm reminder will do the trick. Consistently reminding customers that they must pay their debts is important. Your business can also benefit from setting credit limits to help manage problems with unpaid debt. Also, make it easy for customers to pay you by offering a range of payment options.
Be understanding: It is important to also get to know your customers and their situation. They may have a genuine reason for being unable to pay their debts for the current period due to extenuating circumstances. Being considerate in times of financial strain can have its rewards: clients will value your understanding. Where possible, client relationships should be protected.
If you have questions about how to manage bad debt, or wish to speak to one of our finance and accounting experts, contact The Quinn Group on 1300 QUINNS (784 667) or submit an online enquiry.