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You have worked too hard to let your business go to the wall. This page shows you how to avoid business bankruptcy. Think of it, you have birthed an exciting idea, devised a business plan, applied for a business loan and pleaded for government funding. You may have a premise, equipment, possibly staff and even transport. It’s a lot of work, more than you perhaps realised but finally, you are running your own business. While not quite businessperson of the year, you are doing just enough to make a decent profit.
What could possibly go wrong? The answer is bad debt.
Having provided a service to the best of your ability, there is nothing more aggravating than being let down by customers. Non-payment of invoices is the fly in the ointment of every healthy business. Even though you perhaps expected invoices to go unpaid from time to time, the significance of bad debt should not be underestimated.
Let’s take a look at an example. If you have a gross profit of 20% and £5,000 in outstanding invoices, you will need to find an extra £25,000 in sales to compensate for you losses. By applying a similar calculation to your own profit margin, you can see how uncontrolled debt can seriously risk the success of your business.
Credit control is crucial if you want to prevent your business from haemorrhaging money through unpaid invoices. Establishing terms with your customers must be done at the outset and most importantly, upheld. Enforcing your terms with customers will greatly improve your chances of avoiding bad debt.
The importance of exercising vigilance on invoiced customers cannot be downplayed. If you are unable to devote the time to chasing invoices, look to employing someone to keep track of debts on your behalf.
Depending on the nature of your business, there are ways you can reduce the risk of bad debt. Some of the following tips can help avoid business insolvency:
For this incentive to work your discount must be significant. Anything below 15% or even 20% is unlikely to compel customers to pay invoices early. You could also consider a large prompt-payment discount rather than a sales discount. Whereby instead of putting a item on sale at 30% reduction, you offer a 30% discount for prompt payment of invoices.
Depending on how long your business has been established, you may benefit from increasing your prices. It may not sound like a feasible way to reduce bad debt but try tying in a discount, whereby customers remain eligible for former prices if invoices are paid within 7 days.
Discount incentives do no suit all kinds of business, so your most assured way of avoiding debt would be to request payment upfront. Customers are often happy to pay upfront if your level of service is dependant on it. Explaining that immediate payment would ensure you have adequate resource to improve your service should meet with their approval.
Many retailers, such as car dealers and furniture stores offer customers finance agreements. Yet you do not have to sell cars or coffee tables to benefit from this arrangement. Financing agreements could allow your business to make more sales as well as re>ceive payment a whole lot quicker. Many finance companies offer a variety of finance options. Some professionals, for example, offer their clients the opportunity to pay in instalments by signing a simple agreement with a finance company – and because it is what is know as “recourse financing”, there are no processing delays, very low rates of interest, and the finance company guarantees never to turn down an application.
For prompt payment of invoices, try giving customers a priority booking service, repair visits, free upgrades or even free delivery. Or perhaps your business is more suited to offering lower minimum order quantities, extra technical support, special offers on upgrades, extended warranty terms? Whatever the nature of your business, the objective is to make these benefits exclusive to customers who pay on time.
There is nothing more frustrating than upholding your side of the bargain only to have the customer delay paying you for the service. The problem with unpaid invoices is they usually come hand in hand with a variety of excuses. To help you spot the difference between a true story and a tall one, we have compiled the following list of Top 10 excuses:
If you have any amusing excuses to add to this list, please share them with other visitors on our Forum.
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