Avoid business losses through debt - Business Works
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Avoid business losses through debt

by Nick Breton, Head of Direct Line for Business With more than a million Small and Medium Enterprises (SMEs) based across the UK, they really do make up the backbone of the British economy. Cash flow management is vital to the health of any enterprise and needs to be taken extremely seriously. Business operators need to understand how to reduce their risk of not being paid, as well as how to protect their stock and reduce liabilities by having appropriate business insurance says Nick Breton, Head of Direct Line for Business.

Our research shows that around one in five (19%) of SMEs said that they had written off debts with an estimated average loss of £31,330 in the past financial year. Almost one in ten (9%) of these SMEs claimed to have written off debts in excess of £100,000.

The research shows that SMEs wrote off a combined £5.8 billion in the last financial year, the equivalent of more than £21,000 every day. It is alarming to see just how much hard work goes unrewarded, especially when considering that many SMEs appear reluctant to chase debts, with reasons ranging from thinking that the client may not be able to afford the cost to damaging their relationship.

We asked why their business had decided to write off unpaid debts and the biggest reason, cited by 29% of respondents, was that the supplier had become insolvent and was, therefore, unable to pay the monies owed. This was followed by 17% who said that they did not think that the supplier would have sufficient funds to cover the debt


Most common reasons for writing off unpaid debts


Reason

%

The supplier / customer was insolvent so couldn't pay the monies owed

29%

My business didn't think the supplier would have sufficient funds to pay the debt owed

17%

My business didn't have time to 'chase up' the debt owed

11%

My business didn't have the funds to 'chase' the debtors through the Courts

11%

My business didn't want to damage a future relationship with the supplier / customer by demanding the debt owed

10%

My business didn't know how to go about reclaiming monies owed

3%

Other reason

13%


It is alarming to see just how much hard work goes unrewarded, especially when considering that many SMEs appear reluctant to chase debts, with reasons ranging from thinking that the client may not be able to afford the cost to damaging their relationship. All of these debts add up and with nearly 7000 companies estimated to have entered liquidation in the first half of 2016 alone, the potentially disastrous knock-on effects of writing off monies owed are clear.

The research also revealed that 82% of SMEs currently have balances outstanding from their debtors, with the average business being estimated to be owed £62,957. More alarmingly, a further 40% of SMEs who have written off unpaid debts in the last financial year, claim that they don't even know how much money they are owed by their debtors, which highlights the need for greater cash management amongst smaller businesses.

The reason that so much money goes unclaimed could be due to a lack of awareness of the proper channels for reclaiming unpaid income. Nearly two thirds (65%) of SME owners and decision makers said that they were unsure what the N1 Claim form was for (the document used to start a Civil claim in the English court). Only one in eight (16%) business operators knew exactly what the form was used for.

While maintaining a healthy relationship (and thus ensuring future income) is essential for businesses, many small businesses cannot survive without regular cash inflow. SMEs should ensure that they are fully aware of all legal avenues designed to help them recoup all of their owed monies. In addition, they should ensure they have the correct insurance in place to account for any loss in earnings that may come about if and when a client or supplier is unable to fulfil their financial obligations

Here are our top tips for SMEs to protect themselves from having to write off bad debt:

  • Working only with businesses that you know and trust goes a long way to ensuring that debts are paid off. If you know of a company that has a reputation for not paying its debts you should carefully consider whether it is worth the risk in giving them your services.

  • Know your rights: There are many legal channels designed to help businesses that are owed money - even if their client is bankrupt. Make yourself familiar with the different options available and seek legal counsel if you're not sure of the best approach.

  • Don't be afraid to take control. No matter how good or bad your relationship with your client is, if you provide them with a service they should pay for it. This is how business works and you shouldn't be afraid to ask for what you are entitled to.

  • Making sure that your business is sufficiently covered should the worst come to the worst is vital. Having a major debt written off could have catastrophic repercussions for a business, so it is therefore a wise move to ensure that your business insurance will cover you in the event that a client is unable to fulfil their financial obligations.

  • Something like our own Business Legal Documents service provides policyholders with access to vital legal documents to aid debt recognition and recovery such as the N1 Claim form for debt recovery, which once completed are checked by qualified, experienced solicitors.

The challenge for many companies is how to extract monies owed from a partner, customer or supplier without damaging their future long-term relationship. Employing a credit referencing service can help identify the financial health of the businesses being traded with, check whether they are solvent and also what their current payment practices are. Also having strong cash management processes in place such as sending reminders before the end of the contract and calling the client to make them aware of any monies owed can proactively manage late payments and help mitigate the risk of this situation occurring.



For more information, you can visit Direct Line Business Insurance



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