Be decisive when bad debt escalates

Debt write offs are inevitable; credit management departments that say otherwise are hopelessly optimistic, especially in these incredibly uncertain economic times.

The trick is spotting the problem early and keeping the loss to an absolute minimum.

Signs of payment problems come in many forms, including delayed settlement of invoices, spurious disputes, requests for longer credit terms or round sum payments against the outstanding balance.

The first warning could be an unexpected rise in order levels. Perhaps other suppliers have put them on stop? Industry gossip is also always worth listening to.

If you use credit insurers, the biggest red flag of all is when they reduce cover on a customer or pull it altogether. They know your customer’s finances far better than you do.

The moment there’s any doubt, decisions must be made immediately. Do you cut the customer’s credit limit, change to cash up front or stop supplying altogether? The decision needs to be informed, based on all the information you have, the scale of the risk for your business and an adult conversation with the customer about their problems.

You must be decisive, no matter how good the customer relationship. What begins as a £500 dispute can so easily escalate into a £20,000 bad debt. Just remember, if your profit margin is 10 per cent, that write off means you need to do an extra £200,000 in sales elsewhere to repair the damage.

If your bad debt problems are escalating, it’s time to check your own business’s viability, or better still call in expert outside help to advise you on the way forward.