Due to the high ratio of bad debts, there are high chances of insolvency. Therefore, it is essential to control bad debts. Read this blog to know how a business can avoid the biggest threats.
In any business, bad debts and insolvency are interrelated threats. Due to the high ratio of former (bad debts), there are high chances of occurring later (insolvency). Therefore, in any business, it is essential to control bad debts.
What are Bad debts?
Bad debts refer to receivables as Irrecoverable Debts. In simple words, bad debts mean irrecoverable amounts from debtors. These can be due to trade disputes, fraud, or insolvency.
What is Insolvency?
Insolvency is a state where a person or company unable to pay the certain owed amount owed. This situation mainly arises when debtors unable to pay back cash which affects your business cycle. As a result,
- Companies unable to clear their bills on the due date, and
- Liabilities exceed Assets.
How to Deal with Bad Debts and Insolvency?
Here, best accountant gold coast has suggested some easy ways to deal with these two biggest threats in any industry:
Avoid Late Invoices That Trigger Insolvency Risks
Having key customers is important for business. But relying completely on them can be the biggest blunder. Some small businesses do this mistake and start relying on one or two major customers. That results in a reservation of the highest portion of financial reserves. And more importantly, lack of security is another major mistake. Because in case of dispute with major players(Debtor) can lead the business’s financial conditions worst. Even it could lead to the failure of your business. Therefore, it is essential for a business to explore their resources to reduce risk or to take adequate security before selling goods on credit.
1. Improving Cash Flow
Anything that improves the cycle of cash flow and reduces insolvency risk must be welcomed. For example:
- More efficient invoices
- Holding less stock
- Make an accurate cash-flow forecasting
- Using Finance Invoice
2. Reducing Business Expenditures
Spending less is going to positively affect your financial conditions and boost cash in hand. Here, we have some reasons:
- Choose to lease than buying for every high-cost equipment
- Go with changing technology
- Outsource some works to save on wages on permanent employees.
- Follow a strict business budget.
- Cut inefficient or low income-producing edges.
- Use teleconferencing to save high cost on travelling
3. Issue Notice to Struggling Workers
In every business, there can be a high number of workers struggling for their work. This can be of two reasons - first, not upgraded with the changing technology. Give them proper training to accomplish your work in the least time. Second, works that are unwilling to complete their tasks on time. These results leading the business into bad financial condition. Therefore, it will be better to serve notice to such unwilling staff for the betterment of the task or leave the organization.
4. Check Credit Background
Before making any credit transaction with a customer, it is essential to ask for trade references or invest in an online credit check. This will ensure you regarding payment recovery. Keep in mind, all sales may not be profitable. But ensure must be protected to safeguard you from bad debts and insolvency threat.
5. Trade Terms
Make sure all your trade terms must be cleared before delivering goods. You must always send a copy of the invoice with goods to ensure goods matched as per order. It will also set a standard for a business relationship. Therefore, be sure it must be fair, honest and upfront the outset that guides your customers. Good terms of trade contract protect the business from uncertainties.
6. Be Sure Contact Mus be Up-to-Date
It might sound simple, but sometimes ignorance of contract update cost business too high. Such contracts are not considered valid in the eyes of laws. And making a transaction during this period can lead to bad debts. Therefore, give special instruction to back admin staff to check and ensure every agreement is updated or not.
7. Check Your Customer’s Payment System
Consider every mode of payment fit as per your customer’s need. This will make convenient for customers to pay on time. Hence, your business must opt mobile payment, plastic card payment, cheque and cash on delivery for customer convenience payment options. This will reduce late and non-payments.
8. Revise Business Terms
Its is common for businesses to revise their business terms from time to time. For this, do not afraid to charge high prices from customers that pay late. Offer them some discount that reduces their amount from total sales. If required, be ready to strict with debtors to save your company.
9. Seek Help
If you might be facing difficulty to recover debts successfully. It will be better to take advice from a professional accountant or accounting firm. They will help you to take prompt further actions.
Finally, while considering trade credit, always ask your customer’s payment duration. You can fix monthly dates and limits, beyond that you will not allow any credit. This will improve financial conditions and reduce risk. You can also safeguard your resources with insurance and avoid risk factors.