Debt Management

 

Debt can be healthy; as the adage goes, “it takes money to make money”. Debt can be used to start a business, grow your business and to make capital investment for your business needs. Good debt management is crucial to maintaining and sustaining your business into the future.

There are five key factors to keep in mind when developing a debt management system that is efficient while also preserving good business relationships with customers and suppliers, creating a steady cash flow and limiting your business’ exposure to the ‘good kinds’ of debt only.

As with all relationships, communication is key and effective debt management demands that it be multipartite. As a foundation, you must have clear and open communication between you, your staff and with your finance manager, bookkeeper or accountant to ensure that any work performed or goods sold by your business are invoiced properly, each and every time. Discussing payment terms with your customers upfront is likely to reduce confusion and complaints after the invoice goes out. Once invoices have been sent, contact your debtors with reminders – whether by emails or phone calls.

 

Not only is it a legal requirement that companies and businesses keep financial records that accurately record and explain their transactions, financial position and performance, a clear transactional record also enables a business to render invoices quickly and can ensure invoices are paid promptly and with minimal dispute. It you are concerned about a particular debtor, keep records of your unpaid invoices, copies of any letters of demand, correspondence and the relevant contract (if any). This information will be of crucial importance to your lawyers if you ever have to enforce the debt later on.

This point goes hand in hand with “communication”. When invoices become overdue, send reminders, monthly statements or make phone calls. With businesses taking an average of 50.4 days to pay, reminding your customers that you are serious about getting your invoice paid is likely to increase your chances of getting paid on time (or at least earlier than the 51st day!). Remember the squeaky wheel gets the oil.

 

If you are going to allow extended payment terms to any of your customers, get your customer to acknowledge the debt and the payment terms in writing first. If they later default or try to dispute the debt, you will have written evidence to produce to a Court. Also consider whether you should take a form of security if the payment terms are significant.

 

There are a plethora of debt recovery options including letters of demand, debt collecting agencies, statutory demands and legal proceedings (each of which is a topic in itself). Be aware of what debt recovery options are available to you; understanding the timeframes in which you need to take action, as well as the cost and potential time drain in pursuing the debt, will assist you in making effective debt recovery decisions for your business. The size of the debt, the identity of the debtor and your terms and conditions will all contribute to determining the most appropriate debt recovery mechanism. Spending $40,000 to recover a $20,000 is probably not the most effective use of your business funds and is an expenditure that the informed business owner can easily avoid.

Enforce recoveries is a team of experienced debt recovery professionals who provide support and results for our client’s businesses. We offer fixed fee service costs for initial letters of demand prepared by a lawyer. Get started now!

Strengthening your relationships with your lawyers, and improving their knowledge of your business and structure, can also assist to manage and recover those debts that become overdue quickly with minimal impact on the day to day management of your business.