We regularly analyze financial statements and provide specific profit-saving and profit-generating suggestions to our cash flow clients. Lately, we’re pleased to see many family businesses significantly reduce, and in some cases completely eliminate, their bad debts.
For those of you not quite so fortunate, we’re giving you 10 tips to eliminate bad debt.
1. Don’t let any product go on credit without a fully completed and thoroughly researched credit application.
2. If you don’t have a knowledgeable credit person on staff, get one. They’re worth their salary many times over.
3. Make credit decisions based on each customer’s ability to pay, not how much product they want to buy. This means you must get financial statements and scrutinize cash balances, equity position and leverage.
4. Send your credit manager to local credit association luncheons. Normally, word on the street about customer financial problems is accurate.
5. Check credit history and repayment trends. Most family businesses can’t afford slow pay accounts — and slow pays turn into no pays. Get to know friendly bankers at your local banks who’ll give you checking account information embellished a bit beyond the normal date opened and average balance.
6. Once credit is established, monitor customer financial health, particularly on large accounts. Any negative changes should be immediately discussed with the customer.
7. Take collateral on large (or questionable) accounts. Rolling stock is easy to secure and serves as an incentive for the customer to stay current.
8. Monitor your A/R agings closely. Call your customers as soon as they run late. Charge finance fees.
9. If a delinquent customer needs to be worked through a seasonal downturn or a one-time problem, convert the amount due into a note receivable getting collateral and personal guarantees.
10. When a problem account makes payment by check, immediately cash it. If you deposit it instead, there may not be any money left in the customer’s account by the time it’s processed. Strike while the iron is hot.
When we talk to family businesses about bad debt, they often say, “I should have seen it coming because…” Next time you see it coming, act immediately. You don’t do a dying business a favor by continuing to supply them with product they can’t pay for. Plus, your charitable donation will be put to better use in a local youth program.
