Bad debts is a killer if it goes beyond control. Let's take a look at how to avoid bad debts ?
Many business houses go into deep problems and the reason strangely is that they don’t have sufficient working capital to run their business. One of the major reasons for a company to have a tight cash flow is that they are giving too much credit in the market and fail to recover money from the debtors.
It’s very easy for many companies to sell their goods on a credit basis, but doing business on a credit basis has its own bottlenecks. If your debtors amount increase chances are there that you will not only lose the money but also the customer so its always healthy to maintain a healthy credit line with your customers. Below are some tips to maintain a healthy credit line with your customer and also some suggestions on how to avoid bad debts. So, let’s begin.
To begin with try to deal as much as possible in cash sales and avoid the credit factor. But if you are a big company or a rapidly growing company then you can take a few steps to secure your money before it turns into bad debts.
- Have proper accounts. Having a dedicated accounts team always pay off. Lot of money gets into the loss category due to the improper maintenance of accounts. If your record keeping is bad then you are sure to fail. How will you ask money from a customer if you yourself are unclear about the amounts?
- Have a dedicated receivables accountant or collection officer. Its very common and in human nature that we lose our productivity if we are not focused. So, it’s always advisable to put a dedicated person for the collections so that he is completed focused on getting money from the customers. When he is able to give undivided attention towards this task, he will always produce better results.
- Study the customer thoroughly before approving any credit line for him. You should collect the data for the customer through a credit application form and then do a due diligence on the customer. You can call his trade references and ask them about the creditability of the customer.
- Start small. When you have completed the due diligence then you should test the customer by offering him small credit terms initially to test his commitments.
- Send regular Statements: Its always better that you forward the customers statement related to their outstanding invoices ever month. This will not only help you to collect the amount faster but it will bring awareness in the customer and he will always remember to pay you. Ask for a confirmation of the receipt of the account statement.
- The golden formula is to follow up, follow up and Follow up. If possible then try to make a physical follow up with the customers. This will keep them thinking about you and they will pay you much quickly.
- Keep a strict watch on the payment dates. I have observed during my 28 years in the Finance industry that many customers start on a specific term of credit period but then slowly they increase the credit period from their end by slowly pushing the dates of the payments, keep a watch on these customers, be firm and always push them to pay on the agreed terms.
- Maintain proper documentation. One important thing to remember is to remember that when you are giving credit to your customers, it’s the risk that you are taking. In a worst scenario if the customer takes you for a ride for your payments then to fight him legally you will need proper documentation to prove your claims. I have seen many cases in my life that a company lose their claims towards a debtor because they don’t have proper documentation to prove their claim. When dealing with credit customers always make sure that the purchase order is properly signed and stamped and the credit terms are properly mentioned. Also you need to make sure that the delivery notes prepared towards the delivery of goods are properly signed and stamped by the customer. And lastly make sure that the invoices are delivered on time with proper receipt of the same.
You can’t eliminate your credit risks all together in business but you can minimize your bad debts if you follow the above steps to maintain a healthy credit line with your customers.