One of the main reasons that businesses fail is due to debt. The result is a drain on cash flow and liquidity for the company to trade effectively. To manage a business you must minimise any form of debt including payments from your customers, but also payments and outstanding invoices to your suppliers/creditors etc. If you do not manage these payments and maintain a low level of debt, your financial situation can quickly spiral out of control. A business can find itself with an insurmountable pile of bills and debts which can easily run into the thousands and severely hamper their cash flow.
So how can you run a business and protect it from debt? How can you be proactive and ensure that you maintain a steady cash flow and recover any owed payments? There are actually several easy steps you can take to do this and once you start to stay on top of your debts, you will find that running your business becomes that much easier. The following article should enlighten you on debt protection, and the methods you can take to recover those irritating outstanding payments!Common Business Debts
Before we look at how to protect your business from debt, it is important to identify the different types of debt, and why outstanding payments etc can become detrimental to your business.
The main type of debt in most businesses is customer payments - if you are not in a retail environment where your customers pay for their goods at the point of sale, invoices can often take while to process. In most B2B environments, a supplier and customer will have a set payment period - this could be 30 days for example. That means that you will not receive payment for your service/goods for a minimum of 30 days after the sale.
Not all customers will pay their invoice on the exact payment date however and this is where debts can arise and cash flow can become restricted - if you are waiting 30 days for your customers to pay, the longer they go over the allotted period, the longer you will have to survive without an income. Other debts could include payments from partners or stakeholders for example.
So how can debts affect your business? The following is a brief list of how outstanding payments can potentially cripple your business:
- Reduced cash flow
- Deterioration of customer relationships
- Inability to pay bills
- Inability to pay suppliers
- Increased stress levels for staff and management
- Inability to maintain production/services
As you can see, debts can have far-reaching consequences and can severely hamper your ability to keep your business running.How Can You Protect Your Business From Debts?
Now that you understand how debts can arise and why they are harmful, we have compiled a list of ways you can recover debts effectively and protect your businesses financial security:Actively trace and manage debts
if you do not maintain some form of debt register, how can you hope to chase payments and recover any money? Your accounts department should have a compiled database of all outstanding debts and know exactly who owes money and when payments are due. Debt management is an easy method to implement and can greatly improve your efficiency when dealing with payments.Communicate regularly with customers
Have your customers received an invoice? Do your customers know what payment terms have been agreed? Have you contacted your customers to inform them of their outstanding debts? Communication is key - don't simply send an invoice and hope that your customer will pay it - speak to them regularly and keep an amicable line of conversation open to speed up the process.Set out clear payment terms and chase them promptly
Be sure that your customers are fully aware of your payments terms - if they are not, then they may delay payments. Also be sure to state the consequences of non-payment. Your accounts or credit control department should also actively chase debts - using the debt management database mentioned above, your credit control team should be able to effectively chase debts and stay on top of outstanding payments.Issue Statutory Demands
If you are struggling to recover outstanding debts, it is possible to issue a statutory demand
. This is a legal document that requests payment within 21 days. If the debts remain unpaid within 21 days or an agreement has not been reached, further legal action can then be taken. A process server can deliver a statutory demand by hand to ensure it reaches the intended recipient.Compile a pre-sue report to check on ability to pay debts
A process server can compile a pre-sue report to ascertain whether your customer can pay their debts. This report will detail their current financial situation and should help make it clear if you need to take legal action, or if you can simply continue to chase the debt in the likelihood they will pay eventually.
As you can see there are numerous ways in which you can chase payments and make the process run smoother. Using the services of a process server
can prove invaluable when dealing with outstanding debts, and it could also prove useful to seek legal aid. Don't let outstanding debts consume your business! Be proactive and maintain a debt-free operation - your business will benefit in the long run, and you can then turn your attention to other important tasks.