4 Tips To Avoid Bad Debts

Nearly all businesses, irrespective of their size, will at some point experience a customer that for one reason or another cannot pay their bill. When this happens, it has the potential to inflict quite a lot of financial pain on the business.

So, what can business owners do to minimise bad debts in their business?

#1 Utilise A Credit Policy

When signing up new customers have them sign a credit application form which sets out the terms and conditions of trading with your business, including credit limit, payment terms, late payment charges, director guarantees (for companies) and for those selling goods, a retention of title clause. A credit policy can greatly improve the quality of account-based clients by weeding out marginal or risky clients who refuse to provide director guarantees or sign credit application forms.

# 2 Ask For Deposits Upfront

If you receive large orders insist on deposits. This strategy may assist in minimising potential losses and will help reduce the size of your accounts receivable balance. It will identify customers who are serious about their order and have a genuine commitment to the transaction. When customers refused to leave a deposit, this may be a signal that they are in financial difficulty and could have problems paying the balance of the invoice. It essentially becomes a show of confidence in the customer if they front up some cash at the beginning of the transaction.

# 3 Send Statements Every Month

Statements and overdue reminders are tremendously important. Many businesses fail in this area. If a customer misses an invoice, they will never know unless you send them a statement to check their records against yours. Send invoices as soon as jobs are completed, or goods have been ordered and collected. Reminders are an important part of collecting late accounts, the squeaky wheel gets the oil so be as loud as possible!

# 4 Get Legal Advice

Once you have exhausted all the above processes, any overdue accounts need to be collected through the legal system by seeking the services of a commercial lawyer or debt collection agency. Their advice will be required to ensure that you comply with commercial law rules starting with the letter of demand all the way through to a court judgement.

Keeping on top of your collections process is key to minimising bad debts, maintaining a healthy cash flow and maximising your chance of attaining a long-term successful business. This is achieved by completing your bookkeeping in a timely manner and running your accounts receivable report on a regular basis.