Reports indicate that small to medium sized business enterprises in Australia are struggling with overdue customer debts. In fact, two out of three SME’s are owed at least $10,000 by customers and one in ten report overdue invoices of $100,000 to $500,000. Needless to say, such debt is driving an increasing proportion of businesses to apply for loans just to cover their operating expenses and is a leading cause of business failure.
The consequences of bad debt are readily apparent. Despite this, many businesses fail to take debt collection seriously. A recent survey found that 63 percent of businesses wait over 90 days before referring debts to a debt collector. Sadly, statistics show that after 90 days, the chances of recovering an invoice have already dropped considerably. This means businesses are passing up the prime opportunity to recover their funds, which are ending up as write-offs and lost profits.
Australian Small Business and Family Enterprise Ombudsman, Kate Carnell recently commented,
“Through all my consultation I’ve found that if there’s one thing that would change lives for SMEs, that would be being paid quicker…If money doesn’t come in at the same time it goes out, all it takes is one bad week or bad month to really cause a problem.”
This begs the question, with so much at stake, why aren’t businesses taking debt collection seriously?
They’re complacent because sales are up
When sales are up, many businesses gain a false sense of security and impulsively direct the bulk of their resources into servicing a new client or a flurry of orders. Meanwhile, insufficient attention is given to collecting payment for work already done, and cash flow can quickly dry up. Often forgotten is that clients ≠ cash. Payment must be collected, which of course requires a consistent and effective accounts receivables system.
They believe their clients will come through in the end
While some businesses are aware of the unhealthy number of debtors creeping beyond the 90-day mark, they honestly believe their clients will pay when they can. Such confidence in their client’s integrity is touching, however, the reality is that debts over 90-days will not get paid in the absence of active collection procedures.
Stacey Price, Healthy Business Finances founder notes, “…the big thing is that people just assume that people will pay, then they don’t chase it until it’s 30 days beyond the deadline…This can cause significant problems for a business because if they don’t act fast enough, they may suddenly realise that despite having work on the books, they don’t have cash rolling in.”
They don’t want to rock the boat
Similarly, some businesses just don’t want to upset, lose or have an uncomfortable interaction with their clients and end up burying their head in the sand. They would rather devalue the per unit cost of their work than have to broach the issue of debt with their clients. In fact, it is not uncommon for businesses owners to feel guilty chasing payment, even though they have done the work and there is no dispute.
They give up too quickly
Some adopt the view that if they haven’t managed to recover an outstanding debt then there’s no point ‘throwing good money after bad’. Others reach a point where they are at odds as to what to do with the debt and end up writing it off so they can move on and divert their energies to new orders in the hope that the latter will offset the former. Unfortunately, this teaches clients that if they delay long enough, they can get goods and services for free, thereby perpetuating the problem.
They don’t know what they’re missing out on
Many businesses assume that oppressive client debt and lack of cash flow is an unsavoury ‘given’ in business life. This reveals a lack of awareness and understanding of what commercial debt collection services can achieve for their business. Operations large and small have a range of options available to them which can increase the percentage of work they get paid for, maintain consistent cash flow and increase capital and profits.
If any of these scenarios sound familiar, it is possible that you may not be taking your business’s debt collection seriously enough. Improving the proportion of debts you collect has the potential to increase the value of every hour of every day that you and your staff work.
If you are struggling under the weight of client debt, don’t despair. There is a range of affordable debt collection agency for businesses of all sizes. It is simply a matter of seeking the right professional help.