How to Prevent Bad Debt
At the beginning of the year, reports emerged that insolvencies in the UK were now at an all-time high. The amount of people that had to announce their insolvency hit a seven-year high in 2018.
Bad Debts can have a devastating impact on small businesses, quite literally forcing them to close their doors. Not only that, but it can will have knock-on effects on any companies that they owed money to.
According to Investopedia, “Bad debt is a loss that a company incurs when credit that has been extended to customers becomes worthless, either because the debtor is bankrupt, has financial problems or because it cannot be collected.”
Preventing bad debt should always be at the forefront of your mind, as it is one of the biggest threats to small and medium sized businesses. Read the rest of this blog to get our tips on managing and preventing bad debt within your business.
Preventing Bad Debt
Bad debt often stems from several key factors. In this next segment, we want to highlight a few key ways that you can prevent old and uncollectable debt from building up and minimise your business risk. Keep in mind that all these factors often lead to poor cashflow and can present challenges that may halt your entire business operations. Addressing them head-on is often the best way to move forward.
Credit Check New Clients
Don’t let yourself get too excited by a potential new client. Take the time to get to know who you might be doing business with.
As you probably already know, there are plenty of businesses that have a reputation for paying invoices on time (or not). We recommend checking a company’s payment profile by using internet resources like Credit Safe and Experian. Additionally, they’ll also be able to verify whether there are already any pending court actions against them.
The less you know about a potential client, the more you should look into them. If you find out, for example, that a client doesn’t tend to pay on time, then you can tighten up your payments terms to account for this, provide a discount for prompt payments or a penalty for late payment.
Retainers & Deposits
This is very important, especially if you have up-front costs have to make or purchases before starting a job. Paying for materials up front shouldn’t become a business risk, especially if it is a substantial project. Make sure you are transparent about this, as this can help manage expectations. If your client is expecting to pay a deposit, they won’t be surprised when the invoice arrives.
Split Larger Projects into Interim Invoices
Additionally, you can also split up larger projects into interim invoices. Not only does this help clarify the payment process, but it also arranges timely intervals that may help to spread the cost of the job for your client. That way, it won’t be as much of a financial burden on them, but you’ll also know that you’ll have money flowing into the business at regular intervals.
If you’re a marketing or design agency, for example, you might want to set payment installments at regular intervals before, during, and after completion of a given assignment, so that you don’t end up doing 3 months work for no return. After all, long term projects like websites can often experience unscheduled delays, which may complicate things further.
Set Strict Credit Limits
This is one that a lot of businesses seem to struggle with. However, it’s definitely a no-brainer and should always be remembered when trying to prevent bad debt.
By setting strict credit limits on accounts and, more importantly, not going over them, you can control the amount of risk this poses to your businesses. This is definitely a conversation you should have with an accountant, as they’ll be able to help you gain a clearer understanding of exactly how high you should set your credit limits.
Make Credit Control a Priority
There are plenty of ways that you can automate credit control, which is why it really shouldn’t take too much time to set up. For example, you can automate your statements and payments chasers, as well as setting up an overdue invoice process. If you as the business owner are taking responsibility for chasing invoices due, then we always recommend having a dedicated time set aside for credit control so that you can stay top of everything.
Please note that if your business operates in a high-risk sector, it might be worth purchasing some bad debt insurance.
You should never be afraid to ask for money that you are owed. If you are in doubt, taking a debt to legal can be a prudent option.
Terms and Conditions
Make sure your customers are aware of the terms and conditions that apply to a transaction or service. Obviously, these should be on your website anyway, but it helps to make your clients aware of these in case there is a dispute or a late payment. Plus, you can and should charge interest on late payments – provided that you outline this in your terms and conditions.
Get in touch
Are you looking for an accountant that can take care of all your basic compliance needs AND more? Speak to us to set up proper controls and procedures for credit control so that you can prevent bad debt from affecting your business.
Get in touch with us to find out more or download one of our guides for more information.
