In the ideal world your customers would pay in advance of receiving your goods or services.
Unfortunately most of us live in the real world and even if customers pay by standing order or direct debit, there is still an element of credit risk associated with the finance that is offered to your client.
There is a fine balance to be achieved to ensure the business can achieve the pace of revenue growth you aspire, and also guarantee that all new clients will be able to pay your bills promptly, and not just now, but also in the long term.
It is often quoted that only 50% of new businesses will continue to trade beyond the first 5 years and therefore it is crucial to ensure you have the skills and systems to select the right customers.
Bad debt write-off’s can have a huge impact on your business, and in extreme circumstances they can trigger a chain reaction of bad debt misery throughout the supply chain.
For example if you had a £10,000 bad debt and a profit margin of 10%, you would need to generate an additional £100,000 in additional sales to compensate for that one bad debt.
There are 5 simple steps you can take to minimise the risk of bad debt -
1. Extend credit to the right customers
Ensure you have a detailed credit application form and check the customers’ credit before extending terms
2. Monitor your Customers
You should maintain a continuous review of your customers’ finances. A once loyal customer can encounter financial difficulties and quickly turn into a delinquent account. Ensure you use monitoring tools to be aware of any red flags e.g. slowdown in creditor days or CCJ’s
3. Keep your customers informed
We all have many things going on and it is hard to keep on top of everything. In addition to the invoice, ensure you send regular communication to your customers, via email, to remind them of the payment and to put you on top of their priority list
4. Offer repayment options
Make it easier for your customers to pay you by offering options such as payment instalment plans
5. Do not wait too long to seek assistance
Take control of the process and consider external assistance if required in the form of invoice factoring or a collection agency.
Consider using business intelligence systems to ensure the customers you target are financially strong, and monitor their financial stability during your long term partnership.