Credit-term blowouts and unrecovered bad debts can sink many businesses facing tight cash-flow conditions
January can be the month when increased risk for credit and debt comes into sharp relief, a credit services firm warns.
While much industry comment is centred on the importance of sustainable rates, Australian Credit Management (ACM) says credit term blowouts and unrecovered bad debts can sink many businesses facing tight cash flow conditions.
The specialist credit management and debt recovery company believes too many operators and managers within the transport sector delay addressing slow payers and this places enormous financial pressure on their own viability.
“Unless you’re in retail, January can be one of the driest cash flow periods in business but ongoing expenses don’t take holidays,” ACM Managing Director Campbell Woskett says.
“With payment terms continuing to blow out in a tough economy, it’s a time of year when bad debts are often the final straw and can wreak havoc on a business or even cause its demise.”
When a market was slowing and under stress, the potential for non-payment increased among the customer base, the company says.
While the average aged debt profile varies a little from sector to sector, it is generally around 53-55 days.
“Some businesses are finding accounts creeping into 90 days, which should be setting off major alarm bells,” Woskett adds.
Managing an aged debtor profile and keeping this under control is crucial to cash flow.
“A poor aged debt profile and unrecovered debts directly impact on a business’s overall profit margin.
“The older the debt becomes, typically the more difficult it will be to recover.”
While professional assistance in credit management and debt recovery is most often required, there are some additional practical steps businesses can themselves put in place to reduce risk.
They include:
- Setting a credit culture
- Putting steps and controls in place to improve cash flow
- Thinking long-term about transport company systems.
Businesses need to first ensure their credit control processes and credit management.
“Your credit terms must be expressly clear and it is best if they are acknowledged in writing by the customer,” Woskett says.
“I would say that at least 50 per cent of small-to-mid sized organisations have incomplete terms and/or the wrong process.
“This just increases risk if the account does not go as planned.
“Set the standards, communicate this to everyone – internally and externally – and manage your credit.
“Creating what we call a ‘credit culture’ will help you to maintain a good ‘arrears profile’ and reduce commercial risk.
“A bad debt doesn’t necessarily mean a bad customer.”
Professional customer interface is crucial in managing credit and debt recovery successfully.
“The key is to have good and experienced staff taking the initiative to talk to customers and manage a suite of communications with that customer,” Woskett says.
“A credit management team should be tracking early warning signs in certain sectors and this should alert to possible payment issues for clients within those sectors.
“Keeping the communication channel open can help alert you to an issue and lead to an agreement on a payment plan to reduce the arrears. Or it may lead to a discussion to advise the creditor who will need to takes steps to mitigate future credit risk and where possible, preserve the customer relationship.”