What debt recovery costs your small business

I have been asked by a Dynamic Business reader (thanks to @djcoombes74) to discuss the costs associated with debt recovery. The collection of debt is an important topic for businesses and an area that is often poorly managed.

Slow paying customers and bad debts continue to be a big problem for small business, particularly over the last two years as the tough business climate put pressure on cash flows and resulted in companies generally taking longer to pay bills.

The process of debt collection, especially if not managed properly, can take up a big chunk of valuable time and resources that could be better spent concentrating on growing the business.

Most small businesses don’t have a dedicated resource like a credit controller or accounts receivables officer, which means the onerous task of collecting money, is often left to the side rather than being a priority for the business. 

The normal costs associated with debt recovery that nearly every business experiences at some stage, is when an account becomes overdue and reminder invoices need to be sent, follow up phone calls made and the finance team having to keep record of the status of the account if payment has not been received.

Where costs start to escalate is when your finance team dedicates hours and time on the collection task to no avail resulting in the business owner becoming involved in an effort to put more pressure on the debtor, thereby taking the owner away from running the business.

It may be that the business will need to engage either a lawyer or collection agency to hopefully resolve the situation. Court cases aren’t that uncommon and can be costly, particularly if you aren’t successful.

Late payments and bad debt have an immediate impact a business’ cash flow and if not managed adequately a business can quickly run into financial trouble and have difficulties paying their own liabilities.

The extreme costs of ongoing debt recovery problems can be:

  • You lose employees if you are unable to meet salary costs
  • Loss of clients due to an inability to pay for stock or the inability to service them due to a depleted work force
  • The proprietors may be exposed to personal liability
  • In the worst case scenario, it can result in insolvency or bankruptcy.

I find many businesses experience problems with debt collection mainly because they don’t have the right processes and controls in place and also adopt a cautious approach to communication with their clients for payment.  

What you can do to improve your debt recovery efforts:

  • Employ a dedicated collections officer who can concentrate 100 per cent on collecting money
  • Screen potential customers carefully
  • Set realistic credit limits and clearly defined terms and arrangements at the beginning of the contract
  • Offer incentives for early payment
  • Provide progress payment terms
  • Have a systemised process of invoicing and following up late payments. Follow up late payments the day after they are due
  • Verbal communication: you’ll generally get better results with a quick phone call then by sending a reminder invoice
  • Log all calls regarding payment collection to debtors so you get to know your customers’ payment habits
  • Do not be afraid to put a stop on a customer’s account, but ensure this is not automatic and only done on an as needed basis
  • For more information on debt recovery see the ACCC’s guidelines.
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About Author

Michael Derin
Michael Derin

Michael Derin, Azure Group's Founding Partner and Chairman has over 28 years’ experience as a qualified Chartered Accountant within the business and commercial sectors. Michael works across our Technology, Corporate Advisory and CFO operations, managing highly complex projects to success.

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