Business is synonymous with debts. However, bad debts can significantly impact your business. Outstanding debts directly correlate to the business cash flow and the accounts receivable. You can check accounts receivable platform and learn how to improve your cash flow and performance.
Bad debts drain your business finance resources. Bad debts can break your business and close your lifeline. You can save your existence in business by placing better systems and processes. Here are tips to help you prevent and manage bad debts to protect the future of your business.
- Choose your clients wisely
How can you choose your customers carefully? Doesn’t a business perform better with more clients, better leads and more conversions? While it may be true that you need more clients, potential defaulters will cause your debt burden to bulge.
Learn to define your target clients and choose who you want to work with for higher profits and better customer satisfaction. You can engage your sales department, compile your potential client’s credit history and fine-tune your leads.
You can use online sites or call other service providers dealing with the same client to determine their suitability to work with you. Do not ignore any red flags that forecast unhealthy financial habits. You had better lose business with such clients than lose your money to bad debts they owe.
- Tighten your controls
Your checks and balances should be watertight. A business that lacks appropriate controls can run into a financial crisis because clients don’t pay up. Engage the accounts department to put credit controls in place. Limit your debt exposure by using any of the following tips:
- Screen all new clients by conducting a thorough reference check before offering any credit.
- Prepare and present personal guarantees and a credit application form that binds them to pay up.
- Install credit control documents to track your debtors.
- Set reasonable credit limits that determine how much a client can receive.
- Include clear terms and conditions in your trade agreement
You should always have the upper hand when giving credit to your clients. Consequently, you limit your debt exposure and increase their payment probability.
- Place a money upfront policy
You are in business to make money. Your customers need your goods and services because they believe you can meet their needs. Therefore, make it clear to your clients that you do not accept debts because you value your business.
When you ask for money upfront, you send a clear message that you do not accept debts. Consequently, your clients will respect you for that and honor your services by paying upfront. However, it is prudent to allow loyal customers some credit. You should consider a follow-up system to collect your debts. You can also email or call in advance to remind them to deposit your cheque.
- Set your payment terms, conditions and penalties
You should protect yourself from bad debts by ensuring you always have the upper hand with your debtors. Have a written legal document with binding payment terms and conditions for any debtor in your business. You should structure your debts and payment terms to suit you and encourage prompt payment. You should also have incentives for clients that clear their debts in time. On the other hand, you should charge interest for outstanding balances.
Ensure that the document specifies interest charging dates. Additionally, warn your clients about legal fees and recovery charges when they fail to pay their debts in time. Finally, enforce the agreement by having the clients sign their acceptance before offering the credit.
Failure to follow up with your debtor will lead you to a financial crisis. Therefore put your controls, checks, balances and systems to ensure all your debtors pay for a healthy business.