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April 21, 2015

Don’t Let Bad Debts Ruin Your Business

Photo Credit: 401(K) 2012 via flickr

Getting your debtors and customers to pay up on time can be very frustrating. Creating the right collection policy is essential for you to have your clients take you seriously. Any carelessness in collecting payments can ruin your business prospects completely. The damaging effects of a large number of bad debtors may not be so apparent in the beginning, but loom large, if you allow the issue to get out of control.

1. Unhappy Vendors

If your payments are late and many of your clients are not paying up on time, and your cash flow situation is going for a toss, you may end up delaying your vendor payments. This will create an unhappy situation for them. Higher prices and supply lags from your suppliers will hurt business profitability in the long run. If the production cycle gets disturbed, it will make your clients unhappy. They will now be be in a stronger position to negotiate. Lower product pricing will hurt business profitability in the long run.

2. Unhappy Employees

Too many late paying clients will result in a negative cash flow for your business. This leads to delays in salaries which adversely affects the work environment. The motivation level of employees goes down, leading to productivity deterioration. This may further lead to higher levels of attrition and reduced credibility of the company to hire the right set of people. Employees must be kept happy, for better productivity and profitability. Timely client payments ensure on-time payments of employee salaries and rewards.

3. Quality Issues

In a scenario where vendors and employees are unhappy, the overall quality of goods and services goes down drastically. This again puts pressure on sales and revenue. Regular cash is very important for maintenance of machinery and infrastructure in the company. Non-availability of enough cash leads to delayed and low-quality production of goods.

4. Deterioration of Credit Worthiness

A large number of bad debts lowers the creditworthiness of the company. Non-payment of vendors on time, spoils the reputation of the business. With too many bad debtors on the balance sheet, it becomes difficult to raise money from banks and financial institutions.

The Solution

The process of payment collection carries as much weightage as selling of goods and services.  A healthy balance has to be created between signing up new clients and getting paid on time. One should assess the creditworthiness of each client before signing up. This can be done by getting accurate information from industry sources about specific clients.

A professional approach toward payments should be opted for, from the word go. Collections are not a waste of time and this should be understood by the business owner very clearly.

Late fees should always be added to client invoices when they do not pay on time. This can be done using an appropriate online invoicing software.  Client estimates should always be approved before the beginning of the project. This helps in reducing the possiblity of an invoice dispute. Automatic email reminders must be sent to clients before and on the due date. Payment follow-ups should be done over the phone, in case payments have not been cleared, when due. Sales teams must be trained to be vigorous at payment follow-ups.


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Veronika Tondon is business enthusiast. She writes about emerging technologies and opportunities for business. She is working as a marketing manager with Invoicera, a leading cloud invoicing solution.

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