It has been reported that small and medium sized businesses (SMEs) across Britain wrote off a combined total debt of £5.8bn in the last financial year according to research.
More than 80% of the 728 companies who took part in the analysis still have outstanding balances outstanding from their debtors, with the average business estimated to be owed £63,000.
A surprising fact the research showed is that the 40% of SMEs who have written off unpaid debts in the last financial year claim that they don’t even know how much money they are owed by their debtors.
When asked why their business had decided to write off unpaid debts in the last financial year, the biggest reason, cited by 29% of respondents, was that the supplier had become insolvent and was therefore unable to pay the debt.
Other reasons why companies wrote off debts were that businesses didn’t want to ruin customer relationships, they didn’t have the time to chase up debts and they simply didn’t know how to go about claiming the money owed.
This research shows that a significant amount of money is being written off unnecessarily. There are many ways in which businesses can prevent bad debts and avoid cash flow problems, here are a few:-
- Ensure that you have a dedicated person/team to deal with your debt collection as your debtor ledger is probably your most important asset and if managed efficiently there should be a regular inflow of cash.
- Good credit control will help to maintain cash flow by ensuring that debts are paid promptly as and when they fall due.
- Usually if you have a dedicated person or team that manages your debt collection, relationships can be formed with your customers. This will be beneficial as your credit control person/team can discuss any issues regarding late payments in a friendly manner.
- Ensure that you agree payment terms with your customers at the time that the order is placed and that the terms are agreed in writing and shown on your invoices.
- What action can you take if your customers are not paying on time?
- If your customers are regularly allowed to pay late, it will make it more difficult to start insisting on payment being made on time. Make it clear from the outset that payment will be expected by its due date.
- If payment is overdue and your customer is ignoring your request to bring their account up to date, consider whether it is appropriate to stop supplying the customer with your goods or services. At least this will stop the debt from escalating.
- Try phoning your customer to establish if there is a problem.
- If you establish that your customer is experiencing cashflow problems, then agree a sensible payment plan for the debt to be repaid on a weekly or monthly basis.
- Consider passing the debt to a specialised debt collection firm or solicitor to pursue.
If you do not take prompt action, you too could end up writing off debts.