If your company has a bad debt, it indicates an irrecoverable receivable that one of your customers hasn't paid for the service or product you've supplied, and you haven't been able to collect the funds. This amount is essentially gone and must be written off in your books.
Failure to deal with frequent or significant levels of bad debt can cause your organisation to suffer, indicating that credit control and credit management methods need to be improved.
Bad debts can cause great amount of negative effects on your business, including:
Ø Affecting the amount of cash available for day-to-day operations for your business
Ø Putting your own capacity to pay creditors in jeopardy
Ø Creating a business image of chaos or disorganisation in the eyes of the general public, especially your employees and clients
Ø Negative impact of business expansion
Ø If bad debt levels are significant, business can face a threat of insolvency
How to prevent bad debts?
Setting up effective credit management policies and processes, as well as ensuring strong internal control systems, may help limit the risk of bad debt. This applies to both new and current clients.
Effective Credit Management Procedures
A clear and co-ordinate credit control system can decrease your risk of bad debt, track late payments proactively, escalate when required, and ensure that your credit control personnel is well-versed in dispute resolution strategies.
Establish and maintain a positive working relationship
The best method to ensure an efficient credit control strategy is to build strong relationships and open lines of communication with your clients. Making courtesy calls to confirm receipt of papers or in advance of the invoice due date is one of the best methods to accomplish this.
Obtain a credit assessment and reference checks about the company with whom you plan to do business
Assessing prospective clients' creditworthiness before extending credit is a crucial element of the process. You may quickly assess credit risk using a variety of internet services once you've gathered all of the relevant business information, such as the entire trading name, registration number, addresses, and vital contact data.
State clear terms and conditions on business documentation
Establish solid business boundaries by clearly expressing your terms and conditions for trading, including when invoices are due and whether you'll charge interest on late payments if necessary. Have your accountant and lawyer look it through. Before conducting businesses, request clients to sign your terms of commerce.
Invoice at the earliest opportunity
Send out your invoices and statements on time, preferably as soon as you have delivered the service or product. After sending the invoices, It's good to confirm that the invoice has been received, since this can help in the early detection of any issues. You'll also be able to find a reason to contact your consumer and build rapport with them.
When a debt is overdue, chase payment as soon as possible
Follow up on late payments as soon as possible with written reminders, emails, and phone calls. Discover the reason for late payment and discuss an alternative settlement.
If there is still no payment after you have went through all these internal processes, consider to seek professional advice from a debt collection agency about the most effective ways to recover the debts. When you refer the debt on to a third party, the client is more likely to realize you're serious. This usually signifies they'll pay right away — either in whole or in agreed-upon payment plans.
Xservice Debt Collection is a licensed debt recovery agency with experienced debt collectors and professional credit managers. We specialise in commercial debt collection, credit management for small to medium sized businesses and have a strong desire to do the very best for our clients with affordable rates. Our services cover Melbourne (VIC), Sydney (NSW), Brisbane/Gold Coast (QLD) and Perth (WA). For more information, contact us today to arrange a free consultation.