FD Insight: Bad debt policy
For as long as businesses have existed, there have been customers who wouldn’t pay up. It’s unfortunate, but it’s always been so, and it likely always will be.
There are ways to reduce your risk, and there are ways to reduce your exposure, but there aren’t many businesses who can say they are completely immune.
To address this issue, we raised the topic at a recent FD Recruit – FD & CFO Conference to discuss the ways in which this problem is best mitigated.
From protection in the first instance through to what to do when there is no sign of hope, here are the ways in which some of the UK’s most successful finance directors address bad debt.
Get protective of your paperwork
Terms and conditions are few people’s idea of a thrilling read, until the day you’re in a jam and you’re reading through your own fine print to see if there’s a shred of hope. Outlining terms and conditions up front, and getting a signature, is absolutely imperative. Not only does it inform the customer of what’s expected of them, it’s a document that can be used to take things to the next legal level if required.
Of course, most FDs will understand the importance of such paperwork, but what’s most crucial is getting the rest of your team to follow suit. Having to bring out a legal contract can take the shine off the excitement of a new sale - but don’t let anybody shirk this responsibility. Even the customer with the biggest smile and firmest handshake can try to renege on a deal.
Make a nuisance of yourself
Sometimes a customer in debt needs a bit more of an incentive to pay up than just a sense of duty. If you maintain a regular line of communication, each and every time, then customers will learn that you are serious about collecting debts. If you’re not serious about payment deadlines, why would they be? Get into a routine.
And regular phonecalls are going to be uncomfortable to those that owe you the money. You’re either going to play on their conscience or, at the very least, take up a lot of their time. If a customer isn’t feeling very motivated to fulfill their agreement, calling them up could give them that extra bit of motivation. Even if it’s just to get you off their back. Letters through the post will add a bit of gravitas to the situation, too.
Consider a repayment plan
When a customer is genuinely struggling, asking for a large cheque may not actually be an option. In this case, consider setting up a repayment plan where the customer addresses their debt little and often. Break the debt up and spread it out over several months, and feel free to add on some interest for your hassle. To some customers, a large figure may seem so impossible that they can’t even begin to address it. Smaller sums can seem much more manageable.
Consider your options
After phonecalls and letters come the more serious options. If you have a Retention of Title clause in your contract, this will allow you to take back any goods that haven’t been paid for. Serving a Statutory Demand gives a customer 21 days to pay up before you go on to petition for the company to be wound up. Your solicitor will be able to advise on your legal standing and the best course of option, or most debt collection agencies will provide guides (although be wary these may double as sales leaflets).
Know when to give in
In some instances, the cost of chasing a debt, both financially and in terms of effort expended, can outstrip any potential gains. In these cases, it is best to just accept that the money will never emerge, and to write the debt off as a loss.
However, all is not lost, as Revenue & Customs does have procedures in place for claiming back the VAT on such transactions, detailed here: (http://www.hmrc.gov.uk/vat/managing/reclaiming/bad-debts.htm). So that’s something.
Learn your lesson
Whether or not the debt is eventually paid off, review the case to see what lessons can be learned. Can a similar situation be avoided in the future? All businesses will succumb to the occasional bad debt, but if it’s happening more and more often then it might be time to take a look at who you’re selling to, or how you’re going about it. Now might be the time to tighten up those credit check procedures.
Date Posted: July 23rd 2014
Posted By: Sam Jordan