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Bad debt in the business context
We feel that there is a definite distinction to be made between an unpaid invoice and a bad debt. Obviously an unpaid invoice can lead to a bad debt if it is not adequately managed. Late payment of invoices is becoming an increasing problem for businesses as customers manage their cashflow in our challenging economic environment. If these invoices remain unpaid, they could lead to a situation where the invoice amount becomes a bad debt.
So what is a bad debt?
In our view, a bad debt is an invoice where the customer has decided for whatever reason that they aren’t going to pay. Often this could be because the customer and the supplier are in dispute over the services / products that have been provided. Other reasons may be that the customer had previous cashflow problems and now that has resulted in them ceasing trading. Business failures are on the increase, therefore the prevalence of bad debt is also on the increase. More and more companies are in the position where they gradually drift from paying invoices late to a point where they cannot pay at all.
The importance of credit management
Taking into account the economic situation and the prevalence of business failures, it is now more important than ever to prevent a bad debt scenario. Managing late payments can significantly reduce the amount of bad debt. If you actively manage unpaid invoice collection, you can prevent the scenario when the situation deteriorates to a point where the customer simply cannot pay. Our focus is on not letting a late payment become a bad debt. It sounds simple but the priority is on active credit management so that you can limit the risk exposure.
How do we prevent bad debt?
At the Late Payment Service we have a proven process for invoice settlement. This process is designed to be legally compliant and non-threatening but it is also designed to encourage prompt payment. We are often asked, when should we use your services? We usually say that if an invoice is 30 days or more overdue, then there is a likelihood that it could become a bad debt. That said; we actively encourage our customers to appoint us as their ‘appointed representative’ on the collection of the unpaid invoice amount. We obtain settlement of over 60% of the unpaid invoices that are given to us to collect.
How to deal with a bad debt scenario?
- Appoint a credit control / management company like ourselves to collect the unpaid invoice amount that is owed to you.
- If that is not successful, review your options e.g.
- Action via the litigation route (of course this is more complex and often expensive)
- Accept the bad debt has happened and ensure that your accounts reflect this
The key here is to act swiftly to avoid having to either litigate or accept the debt status. We suggest that you actively chase the unpaid invoice and ensure that you follow legal best practice. This is where the Late Payment Service can help.
If you would like to know more, contact us or request a call back.
Author: Late Payment Service Team 2023.
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Why is cashflow so important?
Having a healthy cashflow is vitally important to any business, especially new start ups and small to medium sized enterprises (SME’s).
This is because, without a healthy cashflow position you may not be able pay your suppliers and employees on time leading to all sorts of operational issues that can ultimately lead to the business failing.
Tips for a healthy cashflow:
- Invest some time and effort in investigating the credit worthiness of your customers. A bad paying customer is perhaps a customer you could do without.
- Send invoices quickly. Do not wait until the end of the month before invoicing as that may mean your customers are obtaining extended credit terms beyond the normal 30 days.
- Offer a variety of payment options. Perhaps offer both card payments and direct debit forms of payment via solutions such as Paypal / GoCardless etc.
- Keep detailed records. This is fairly obvious, but often businesses (especially small ones) fail to keep accurate records of who owes them money.
- Schedule your payments effectively. Ensure that you are not committing to too much outlay during periods of cashflow challenges, i.e. whilst you are waiting to be paid for that large order.
- Make sure there’s an emergency fund. Keep a cashflow emergency fund if at all possible. This will enable you to operate with more confidence should there be an element of late payment and bad debt.
- Cut Costs. Review all of your operating costs and look to trim down expenses where this is feasible. Often businesses operate without too much attention of their operating costs, ultimately impacting their cashflow position.
- Cashflow is as Important as profit. Making a profit is obviously important but without the cashflow to function then there is no chance to make a profit.
- Manage credit control effectively. Have the necessary skills and resources in the business to ensure that your cashflow isn’t negatively impacted by unpaid invoices and then subsequently bad debt.
How can we help?
- We operate a successful collection service for the settlement of unpaid invoices, helping to maintain positive cashflow.
- We provide an outsourced credit control and management service for companies that cannot easily provide this function from their in-house team.
Contact us if you would like to know more.
Author: Late Payment Service Team – 2023
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What is Credit Control as a Service?
Put simply, Late Payment Service provides an outsourced credit control and management function for small to medium sized businesses.
The function is outsourced to us, we provide this service as if we were employees of the business but our costs are significantly lower than employing skilled and experienced resources to do the same tasks.
Our overview video is available for more background information.
What are the advantages of the service?
- We have the skills and experience to reduce credit risk and the negative impact on your businesses cashflow
- We work on different levels e.g.
- Level 1 – our basic service is limited to credit control services for the settlement of unpaid invoices, no monthly retainer and standard commission rates apply for settled invoices
- Level 2 – ideal for small businesses, those who need some up front credit risk reduction and perhaps have a number of late payments to chase on a monthly basis. A small monthly retainer applies but there is a 10% reduction on the collection commission for settled invoices.
- Level 3 – applicable to businesses that need frequent credit control services and have numerous late payments that need chasing for settlement. Acting as your appointed representative, we manage the risk of unpaid invoices tuning into bad debt, ensuring that cash flow isn’t negatively impacted. A monthly retainer fee applies but there is a 25% reduction on the collection commission for settled invoices.
- We operate a customer portal. We are fully transparent with our customers on the work we are doing to reduce the level of late payment and unpaid invoices. Each customer has a dedicated area where they are able to monitor the progression of their collection activities and also communicate directly with their agent.
- We provide a dedicated credit control agent for every customer. This enables the agent to become familiar with their customers business and their credit management requirements.
- The service is cost effective and risk free from a customer perspective.
Late Payment Service Limited is based in the United Kingdom (UK) but provides this service for both UK and United States (USA) based organisations.
Contact our team for more details about how to onboard as a customer.
Author – Late Payment Service – 2023
Reading Time: 2 minutes
What did the latest UK budget do for small businesses?
In our opinion, there was very little good news for small businesses in the 2023 budget.
Yes, they are now attempting to simplify the tax system but there didn’t appear to be any real significant support in terms of:
- Decreasing the overall tax burden
- Real support for the labour market and growth in skills development
- Reducing the barriers to trade outside of the UK market
- Reducing the risk of the increased numbers of business failures that are inevitable as a result of Brexit, Covid19 and now the war in Ukraine
What is the impact of this lack of support?
Well, the figures speak for themselves, business failures are on the increase. There were over 20,000 business failures in the UK in 2022, the highest number since the financial crisis of 2008-2009. The likelihood is that there will be 33% more business failures this year than before the pandemic. Since the government reduced its support for businesses, the reality is that businesses are suffering from a reduced market place, rising costs and having to pay back acquired debt such as bounce back loans. The situation for many businesses is become untenable and they are left with no choice but to cease trading.
We expect the situation to get worse before it gets better. All of which means that UK businesses are becoming under increasing pressure and their cashflow is worsening as a result of this.
How to reduce the risk to your cashflow?
- Keep your operating costs as low as possible
- Reduce the potential for bad debt
- Avoid customers who don’t pay on time or won’t pay at all
- Ensure that your credit control function is effective in limiting your financial risk and overall business viability
- Work with organisations like Late Payment Service to ensure prompt settlement of unpaid invoices before they become a bad debt
- Outsource your credit control function to Late Payment Service and reduce operating costs or bridge the existing skills gap
Get in touch with us if you’d like to know more about how we can help small business cashflow.
Author – Late Payment Service 2023.
Reading Time: 2 minutes
Why is there an increasing need to manage cashflow and reduce the risk of bad debt?
The UK economy has been struggling in recent years for many reasons, all of which are now resulting in more business failures than have been seen since the financial crisis of 2008-2009. Business failures result in unpaid invoices, causing the creditors to suffer financial losses and increasing the strain on their own cashflow position.
So what impact will this have on your business cashflow?
The likely scenario is that cashflow will be negatively impacted by unpaid invoices, late payment (e.g. well beyond the invoice due date) and ultimately bad debt.
We are seeing this trend develop since the onset of Covid19. Cashflow is difficult enough for small to medium sized businesses (SME’s) at the best of times but since the pandemic this has become a huge problem. That said, organisations are holding onto their funds and their is an increasing amount of late payment which is having a massive effect on the cashflow for SME’s. The cycle of late payment impacts businesses because it is self propelling in nature, the more customers you have that don’t pay on time the more you struggle to pay your own bills. The current cost of living crisis is just making the situation a lot worse, especially for SME’s which depend upon energy for their businesses to function. This situation is likely to get significantly worse over the next year so careful cashflow planning and credit control / management is required.
What is the best way to manage cashflow?
There are simple measures that can support increased cashflow:
- Ensure that your customers have a good credit history.
- Implement effective credit limits.
- Chase the payment of invoices, promptly so that this doesn’t impact cashflow, we can help you do this using our credit control as a service offering.
- If you have unpaid, overdue invoices, use a credit control function such as Late Payment Service to ensure prompt settlement of the invoice before formal debt recovery is required. Late payment can easily turn into bad debt.
All SME’s need to be proactive in the management of late payments and ensuring that their cashflow position remains strong. Late Payment Service is here to support you, by ensuring prompt settlement of unpaid invoices, effective credit control and management services that are cost effective for all sizes and types of businesses.
Author – Late Payment Service Limited 2023.