Bad Debt

Signals That can Help You Avoid Bad Debt Losses

Even good companies can get into trouble and can’t pay their bills.  Your credit risk is determined to a great extent by your understanding of the credit health of those businesses to which you extend credit.  It pays to avoid losing money to bad debt.

Here are six warning signs that may indicate credit trouble ahead before a meaningful change shows up in their credit rating – which you should be monitoring in any case.

Credit warning signs:

1. Delays in payments.  This is an obvious sign and your accounts receivable system should be set up to monitor and report on this on a continuous basis.  Make sure you have a team of managers who are in the loop so they can see this and any of these other warning signs and take action quickly.
    

2. Changes in ordering patterns.
   1. The first sign may be a slowing in order volume.  This is usually an indication that your customer is experiencing a slowdown in their business.
   2. The last sign may be a surprise order of a much larger size than usual.  This could indicate that your customer is trying to stock up in advance of getting cut off.
       

3. Communication problems.  You or your staff may have more trouble than usual getting through to your contacts at the company that owes you money.  This is especially worrisome when the usual channels of communication for following up on open invoices suddenly slow down.
    

4. Pressuring the sales force.  Your sales force might start getting pressured to make sales in spite of existing credit limits.  This is the time to advise your sales team to keep their eyes and ears open for any signs of trouble at the customer or changes in the market.
    

5. The business sector is in trouble.  Know which sectors your customers service directly and indirectly.  Remember that that business slow-downs trickle down.
    

6. The grape vine is humming.  Keep your ears open for those tidbits of information that are known to make their way through the industry.  Ask all of your people who are in the field or talk to people in the industry to pass on information for the good of the company.  Use any “casual” information legally and responsibly and only with appropriate verifications.

Manage your credit risk deliberately

It is very costly to write off bad debt because you not only lose the profit on the original sales (if derived from sales) but you also have to make additional sales to cover the cost of sales just to break even.

Profit Improvement

Bad debt is a profit killer.  A good profit improvement process invariably includes measures to reduce losses.  Don’t give your profits away.

An economic recession or business recession is also an opportunity.  Invest in tools such as a Profit Improvement Process to capture those opportunities.  Read “Instant Profits: Making Your Business Pay” for over 250 ways to improve your business even in a recession.  There is a lot more to profit improvement than simple cost reduction.  Contact us today to see how you can cut costs and improve profits.