Avoiding Bad Debts
Year end is approaching and it looks like being a good year with healthy profits meaning that a well deserved holiday and new car are on the horizon. And then it happens, a phone call from the Sales Director telling you that a customer has gone into administration owing you a considerable amount of money, enough money to wipe out your entire profit for the year. Suddenly the holiday and car are a distant memory.
When the shock has subsided, you start to look at the loss in more detail and realise that the warning signs were there and that the loss could have been reduced to a much more manageable level or indeed negated completely. Then the loss really starts to hit home as you realise that all the hard work to generate a good level of profitability has been thrown away.
So what are the warning signs and how can bad debts be avoided.
It sounds obvious but it is so important that you know your customer. But what does this really mean? A lot of business sell to their customers on an “I’ve known them for years basis” which can be very dangerous in that do you really know how their business is performing or indeed if the business has changed ownership. Knowing who your customer is and how the business is performing is vital in avoiding bad debts.
Other vital signs are:
1) Slowing payments or a creeping debt turn. Quite often the deterioration in payments happens quite slowly with the odd day per month not really causing too much of a problem with the comfort that there is always a plausible reason for the delay. However, the delay then becomes 2 days and creeps out by a day or 2 each month and eventually starts to cause you serious issues.
2) Late filing of accounts at Companies House. This can also be a strong indication that all is not well. Very few businesses will delay filing their account beyond the filing regulations if they have a good story to tell.
3) CCJ’s are a very real sign that there is a problem. Even if your payments remain good, it may not be long before you too start to see a deterioration and it should always be remembered that key suppliers will usually be the last to see a deterioration in payments until it is too late.
4) The use of credit reports is an important tool in avoiding bad debts. Even more important than the original report requested when a new customer applies for credit, is the ongoing monitoring credit reference agencies can supply. By constantly monitoring your customers performance both financially and on payments will give you early warning signs that a company is in difficulty.
5) Bad debt protection is the most effective way to minimise risk however, many companies do not trade within the limits they are provided with and this can negate the usefulness of having such protection. It should always be remembered that the providers of Bad Debt Protection are constantly monitoring businesses and often receive information which is not in the public domain, such as management accounts. As such, they are often in the best position to set realistic credit limits.
By really knowing who your customer is and by monitoring their performance, along with your own information, this will give you a good chance of avoiding a nasty shock and protect your hard earned profits.