Allowing clients to trade on credit is a common way to facilitate more business. However it can also lead to short term and long term financial burdens when repayment terms are not adhered to and bad debts are allowed to accrue.
Hefty receivable debts place a considerable drag on businesses resources. When bad debts accrue, not only are you losing profits on unrecoverable debts, you are most likely:
- expending staff resources chasing the debts,
- purchasing finance to maintain cash flow, and
- paying fees for defaults and late payments on your own debts.
The cumulative financial impact of bad debt on a business, often leads to a number of game changing consequences which can have devastating effects.
When you are simply not being paid for the work that you do, direct lost profits are just the tip of the iceberg. The additional work you need to do to recoup the lost profits means you are working harder for the same amount of money. For example, if you write-off $10,000 in bad debt and you have a profit margin of 4% you would need to make $250,000 in additional sales to make up for the loss. When employees can see their efforts are not being rewarded, moral can also start to plummet as fast as your profits.
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Bad debt can immobilise your business’s money making capabilities. Capital is required whether you want to expand, transition or grow your enterprise. If poor cashflow has depleted a business’s cash reserves, it will need to seek out finance or external investment. The difficulty is however, that businesses with significant debts are unattractive to prospective lenders or other creditors, limiting their ability to acquire finance or buy new equipment or supplies on credit.
Having no capital, and being unable to obtain finance essentially cripples a business and prevents it from any type of variation or growth.
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At the end of the day cashflow is paramount to the survival and success of a business and a lack of it will ultimately lead to personal or corporate insolvency. If a company or individual cannot meet its repayments to lenders or creditors, they can have their assets seized or be forced into bankruptcy or liquidation. Both corporate and personal insolvency can have long lasting effects on a person’s credit and may limit their ability to conduct business in the future.
Even before a business is rendered bankrupt however, being unable to make all your payments on time can cost you in late fees and charges.
How can you prevent bad outstanding debt?
Businesses can avoid the consequences of bad debt, by optimising their account and debt collection procedures. In many cases the most effective and cost efficient way to optimise a businesses’ collections is to outsource to a specialist firm.
Talk to us now, about how we can enhance your cashflow and help prevent a negative game changing event from threatening your business. We provide debt collection service in Sydney, Melbourne and Brisbane.