How bad debts can affect your business health

Customers will pay late, which means you have to pay suppliers or wages later to keep the business afloat. Or worse, the customers don’t pay at all. While it’s often an annoyance, have you ever stopped to think just how much bad debts could be affecting the overall health of your business, or your ability to grow in the future? If you haven’t, here are a few things you should be thinking about.

What Is A Bad Debt?

To put it simply, a bad debt is a debt that cannot be recovered, or is unlikely to be paid. This could cover any loss your company experiences when you’ve extended credit to customers that then becomes worthless, if they go out of business, go into liquidation or insolvency or are refusing payment on a legal basis. They are different from your average late payers or difficult customers, and you will have a specific section in your accounts to allocate any bad debts you accrue.

What’s The Impact On Your Business?

There is a pretty big clue in the name here. Bad debts are bad for business. They represent payment for goods or services you may have already delivered, sitting in limbo and not ever making their way into your bank account. Over time, this has a negative impact on your balance sheet, your profit and your business efficiency, as you’re wasting valuable time chasing clients who probably have no intention of paying. If you have a large number of bad debts building up, then you need to take swift action to make sure your accounts receivable are being managed properly.

How Can You Avoid Bad Debts?

So, how can you avoid your business accumulating bad debts? We have a few tips for you:

Take Calculated Risks: Every time you work with a new client, you are taking a risk. Will they be a good payer, or won’t they? When making this decision, you need to take into account all of the factors and decide whether they are worth the risk. Doing some basic background research and checks on them can go a long way in helping you make these decisions.

Define Your Payment Terms: Having your payment terms laid out clearly goes a long way to ensuring your clients pay on time. Create a standardised document that details your payment terms, including any early payment discount, late fees and debt collection processes, and ensure all clients receive a copy. Make it readily available in your email signatures and on your websites, so that there is no doubt about your terms.

Find The Reasons: Every time you have a late payment, take a step back and look for the reason why. It could be that the client doesn’t want to pay due to dissatisfaction. There might have been a delay in delivery, a problem with your invoicing workflow or a verbal agreement with one of your staff. Or they could just not want to pay you! Look at the reasons for your late payments, and if you start to see a pattern, then you know what problems you need to solve.

Use A Collections Agency: If you have a chronic problem with bad debts, then it might be time to bring in a collection’s agency. Debt collectors (like us) are the perfect partners to help you ensure that the receivables are being paid on time and can help you pursue legal channels if needed.

At Debtcol, we work with business owners who want to protect their cash flow and keep their businesses running smoothly, without bad debts. Not only can we help collect debts that are already overdue, but we can help you put policies and procedures in place to ensure it doesn’t happen again. Our experts can also work with you to conduct business investigation and analysis on new clients, so that you can be sure every customer you take on has the ability and intention to pay, and there are no red flags in their history. If you would like to know more, just get in touch with the team today.