A matter of life and debt
Article Date: Jul 01 2008As the economy slows, the problems of bad debt and slow payment are looming ever larger and, for some unlucky companies, will prove fatal. Sean Weston, credit manager at corporate lender Venture Finance, explains how you can avoid falling victim to your own individual credit crunch.
Bad debt can wipe out years of hard-earned profits. Particularly for a young company, it can cause real financial strain and threaten business security.
It’s a particular issue at the moment, as the credit crunch gathers momentum. Companies that are already struggling to service large debt burdens are feeling the pain, and passing that pain on to their suppliers in the form of slow payment – or, in the very worst cases, going bust.
However, there are a number of ways companies can protect themselves against the effects of bad debt. Here are some of the measures you can take.
1. Be vigilant
Ideally, you should review the financial position of your customers on a regular basis, especially when a customer represents a big share of your business. This helps to identify when problems arise.
2. Request management accounts
Don’t just rely on annual accounts from Companies House. Request quarterly management accounts so that you can spot trouble sooner.
3. Watch payments like a hawk
When payments slow, even by just one or two days a month, it may be a signal of potential cashflow problems. Don’t let things slide.
4. Vet new customers
Securing a new customer is a cause for celebration – but take care it doesn’t all end in tears. Look beyond the information that is readily provided and ask the right questions. Collecting and checking trade references should be a matter of course, but remember a customer will only provide the names of suppliers that they pay on time.
5. Consider insurance
Bad debt protection can sometimes provide 100 per cent cover on credit-approved customers. It can also pay out against insolvency of a customer, or if invoices remain outstanding after 120 days.
In any business the key to successful financial management is meticulous planning and reviewing. The sooner you can identify customer payment problems, the better you’re able to plan appropriate action, allowing you to concentrate on growing your business with confidence.
