Avoiding insolvency through better debtor management

There is no doubt that Covid-19 has had a deeply negative impact on most businesses. For many there is difficulty in staying afloat. And when your debtors are struggling to pay, your business outlook can slip from okay to dismal in a matter of days.

Truth told, nobody could have predicted this. The worn-wise advice of always running both your business and your life with emergency cash on hand to cover at least 3 to 6 months of adversity, is not always adhered to – and often difficult to implement.

With Covid-19 we are not just facing a bad debtor problem, or a sticky patch of business needing nifty footwork, we facing total cessation of normal business activity – and if your business (or your debtors business or situation) cannot be easily swung to online operation, then your debtors may be genuinely unable to pay you.

Ways to counter the effects of the pandemic

• To keep slightly ahead of the curve, always be aware of your cash flow situation, and have practical strategies to counteract events beyond your control – such as all your debtors struggling to pay at the same time.
• Try not to get into permanent troubleshooting mode. Be prepared to make leniency deals with your debtors in the same way as you would like to make you’re your creditors. Covid-19 is affecting everyone in much the same way. Dealing the cards fairly all round is the way we might all survive.
• Do you have too many small accounts that are barely keeping you alive? Perhaps not the best way to be operating your business. Use this lockdown time to rethink how you might re-structure your client list to be more easily managed after lockdown, with more useful clients with more valuable accounts. Narrow your field but get more manageable punch.
• Do you have any assets you could sell off without uprooting your entire business and lifestyle? An audit can reveal underused assets, including those debtors who pay on time and who might be relied upon to bring in the cash, even if on a revised payment schedule. Secured payments can help to keep the lifeblood of your business going when things get tough.
• Identify those good paying customers who are suddenly reneging on accounts. Deal with these issues swiftly. These are likely good customers who want to pay as usual but because of lockdown find themselves unfairly compromised. They are the ones with whom you can probably work out the best and fairest deals. Treat them as a priority.

Keeping your debtor management as robust as possible

Getting debtor management right is vital for underpinning the entire creditor/debtor relationship. Make sure from the beginning that you have the right steps in place. Under lockdown is a good time to reassess the fundamentals, and correct poor practices. Keep in step with the following:

• The inception of all new contracts should be drafted in clear, unambiguous terms relating to credit and repayments, with clear obligations and consequences built into every arrangement. They should be routinely reviewed and understood by all staff.
• Trading terms should include maximum payment time, and specific terms outlined relating to late payments, such as the accrual of interest. These terms must be clearly communicated and signed. Terms of trade should be documented and cover areas such as prepayments, down payments, terms and any discounts for early settlement.
• Credit management is about safeguarding profitability and provision for potential bad debts should be made during the budgeting process. This is a vital step to minimising bad debtor threat to profitability.
• Credit checks for new and existing customers should be carried out routinely to identify issues which might negatively influence credit limits. Reviewing credit limits regularly is essential to ensuring settings remain appropriate to individual debtors.
• Invoicing should be prompt and regular, with clear terms on the invoice. Always ensure invoicing meets regulatory requirements.
• Follow up on late payments immediately, but keep on good terms with your suppliers because positive customer engagement at all levels is wise.
• Be ready to take action where necessary: reconfiguring payment plans or finding outside help in the form of a professional debt management agency.
• During lockdown it may be futile to take action against debtors who are unable to pay. Also be aware of those who may conveniently allow the debt to slip from their memory once things revert to normal.

LegalTrack – how we do things differently

At LegalTrack we work with real people with real problems and therefore we apply a highly considerate and respectful approach to debt collecting. We understand that we need to be firm, but we are also aware that to negotiate successfully with an individual who is already in a difficult financial position, we need the skilful combination of empathy and experience, backed by well-honed communication capabilities. Our modus operandi is simple, direct, efficient:

• Our first contact is via an SMS.
• This is followed by a phone call to begin the negotiations on how the debt will be paid.
• All payment arrangements/negotiations are confirmed via letters, emails and text messages.
• Our promise is to constantly keep contact with our debtors in terms of all arrangements.
• Any legal action is considered the last option.

Please find out more at: www.legaltrack.co.za