Any business, whether it is small, medium or large, shares many of the same challenges – one such challenge is bad debt. For larger businesses, this hurdle can be easier to overcome, but in the small to medium business, this is something that needs to be monitored closely and managed diligently to ensure that it is not their downfall.
So let’s ask Professor QuickBooks how you can try and minimize or avoid bad debt in your business. This has to be done from day one by laying down foundations for all new clients with preventative measures that lay the legal groundwork to protect the business as much as possible from this problem taking hold. The best way to do this is by following four easy steps:
- Carrying out comprehensive credit checks on any new debtor
- Creating professional fee agreements with customers
- Putting surety agreements into place for companies
- Making provision for collection costs and fees
Once the legal groundwork is laid, a consistent accounting system needs to be implemented with formal policies and procedures to ensure debt control from the beginning of any client/supplier relationship. From this point on there are various elements that need to be carried out in order to ensure that your bad debt problem is minimized. Employees are key in this process and will be able to assist you once they have been given the following tools:
- A full understanding and brief on the company’s policies and procedures on debtors
- Training on how to handle debt
- A no tolerance approach to the mismanagement of debt
Good debtor control policies need to be put in place with a clear outline on outstanding debt, when to write off a debt, not allowing debtors to delay a matter without settlement agreements and effective payment reminders. When in spite of all of these controls the bad debt gets to demand stage, formal processes must be followed in order to legally prove that the client is indeed in breach of contract and has defaulted. The date, manner and account for payment must be stated and you must check to see if in that particular matter the National Credit Act, Sect. 129 applies.
Finally, what manner of collection are you going to employ when you just can’t get that client to pay? There are a variety of choices when placed in this position:
a. The Debt Collector
b. The Debt Broker
c. The Attorney
Each of these in turn comes with a fee which can be a contingency agreement (meaning a portion of the capital), or a party & party basis which is usually the case in bulk work, on a Attorney Client basis it would be full fees or you can do it yourself.
When it comes to collection, the pros are the following:
- If the groundwork is properly done, you have a good chance of success
- It protects the reputation of the firm
- If done properly, there is a minimal loss of clientele
- Interest at the current interest rate per year
- If done by an attorney a large portion of fees are also collectable
- There is a return on investment
- Court orders are enforceable
- Protects claim against prescription for 3 years
There are also cons and these need to be considered:
- Risk of costs order if groundwork is not done properly
- The process of litigation takes time and is prone to delays
- The process is unenforceable if the debtor does not have money
The final process and probably the last resort is obviously a summons and taking the process legal where debtors have the option to service the debt. If they still default or choose to defend against the summons, there is either a plea, which results in a trial, or a summary judgment that will then result in a judgment. Even on paper this process looks long, laborious and costly and it is.
The long and the short of it is that the preventative measures that are laid-down in terms of your debt control, are key. If you have the correct building blocks, you can protect your business against this debilitating problem. Combine this with the right QuickBooks Software package for your business to allow you to make sense of your figures and to stay on top of your finances. Bad debt will thus be taken out of the equation, allowing you to focus on building your business and enjoying its success.