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Let’s talk about bad debts – they’re the unwelcome guests at the financial party that no one wants to entertain.
As a team comprised of seasoned insolvency practitioners, Chartered Accountants and experienced business owners, we’ve got the lowdown on bad debts and how to avoid them.
Bad debts aren’t all cut from the same cloth, but when they accumulate, they can turn a thriving business into a sinking ship.
Every business owner needs to grasp the concept of bad debts and, more importantly, how to shield their company’s financial well-being from their damaging grip.
What are bad debts?
Bad debts rear their ugly head when a customer fails to pay for goods or services despite all efforts at debt collection. It’s like chasing after a mirage – you know the money is gone for good and you have to write it off.
It’s worth noting that sometimes a bad debt might be settled at a later date and your company’s accounts can be adjusted accordingly. However, if you’ve made every reasonable attempt to collect the debt and it remains elusive, for the sake of accurate accounting, you must write it off promptly.
The Consequences of Bad Debts
Bad debts can unleash a cascade of negative consequences on a business.
First and foremost, when your income takes a hit, the daily operation of your business becomes an uphill battle. This means shelving plans for expansion, tightening the purse strings on stock purchases and holding off on recruiting new talent.
Even more troubling is the domino effect that often happens when your business struggles to pay its own debts due to unpaid invoices. It’s a debt spiral that’s hard to escape.
In fact, if bad debts accumulate to a substantial extent, your company might find itself teetering on the edge of insolvency. This is when you might need to bring in professional support to explore viable debt solutions.
An excessive number of bad debts can reflect badly on your business management skills. It sends a signal to both your staff and customers that your company lacks financial discipline and prudence.
Avoiding bad debts: The proactive approach
Preventing bad debts is far more preferable than dealing with them after the fact. While you can’t predict every client’s financial troubles, there are steps you can take to minimise the risk.
- Start by conducting some due diligence. Check your clients’ solvency status at Companies House. If you harbour doubts about their ability to pay, consider setting a credit limit on their account to limit potential bad debts.
- Clear payment terms should be agreed upon before commencing any work. You might even ask for a partial or full upfront payment. This not only demonstrates your client’s commitment but also minimises the risk of late payments.
- Clarity is key; make sure clients have the chance to clarify any doubts before signing the contract.
- Facilitate payments for your clients. It may sound obvious, but some businesses forget to include their bank details on invoices, assuming clients have them at their fingertips. Utilise efficient payment methods like PayPal or Direct Debit services to reduce payment delays.
- When a project is completed, issue the invoice promptly, ideally synchronising it with your client’s payment cycle. And if the payment goes AWOL, don’t be shy about chasing it down. It’s your right, as per the agreed-upon payment terms, and can mean the difference between a bad debt and a recovered one.
- Lastly, where possible, avoid putting all your eggs in one client’s basket. While it might be common practice in some sectors, it exposes your business to risk if that one client runs into financial turmoil, and bad debts start to accumulate.
Navigating the risk of bad debts
While it’s impossible to eliminate the risk of bad debts entirely, you can take steps to mitigate their likelihood and impact.
In today’s volatile market with supply chain pressures, awareness is your first line of defence. But if your company finds itself wrestling with mounting debts or the looming shadow of bad debts, don’t hesitate to seek the guidance of an insolvency professional such as Umbrella.UK Insolvency. They can help you assess available options and steer your business back on course.
Get in touch today
For further insights and assistance, reach out to our knowledgeable and approachable team. We’re here to help you navigate the dangerous waters of bad debts and safeguard your financial stability.
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