Controlling Debt and Keeping your Business Afloat in a Pandemic

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Staying afloat is about the most that many businesses can hope for this year. Any plans for expansion have likely been put on hold as the pandemic continues to bite and to eat into revenue. 

Even the biggest companies are finding the current outlook untenable, with Gap announcing that it is set to close all of its stores across Britain and Ireland. This will mean the closure of 81 retail units and an unannounced amount of redundancies.

As the pandemic continues it is essential that businesses find a way to manage credit and debt properly, keep cash flowing, and stay above water. That can be easier said than done, but here are some methods used by businesses to keep going in 2021. 

Why offer lines of credit?

One of the best ways to avoid being owed too much is to control how much is lent in the first place. Businesses routinely allow other businesses to purchase their goods without making payments upfront. This is done for a few reasons.

  • It encourages customer loyalty
  • It shows trust
  • It can increase sales
  • Attracts more customers
  • Gives flexibility to customers

Small businesses especially rely on cash flow to keep operating, and being able to order products from suppliers without paying upfront means they have more flexibility.

A business that lets its customers pay later is helping to foster loyalty and generate return business. It is also likely that if there is credit and favorable payment terms, that the buyer will make a larger order.

Customers are also likely to gravitate towards businesses that allow some form of credit and do not demand instant payment. This leads to a bigger customer base and more orders. 

Controlling customer credit

It is clear that many businesses are struggling due to the debt that they have accumulated, and their inability to pay it off due to the effects of lockdowns. The Galway construction company facing the High Court over alleged debts is just one example of what is happening to businesses today.

When businesses offer credit they must do so responsibly or there can be catastrophic consequences. More than 23 billion GBP was owed to British small firms last October, much of it by much bigger firms who were holding on to invoices.

Small businesses are very vulnerable when they let their customers have too much credit, so it is important to perform proper credit checks. There are plenty of software options available that allow credit management and control, so that debt doesn’t spiral out of control. 

What would happen if a business doesn’t perform good debt management?

If businesses do not recover their debts then they too will suffer from cash flow issues. This will lead to them not being able to pay suppliers, and could even lead to redundancies and eventual liquidation.

Businesses rely on cash flow in the same way that humans need blood. Cash is what keeps small businesses alive, and when it is cut off, they die. When a firm extends too much credit it can affect every other business in the chain. If business Z goes bankrupt owing business Y, then this can reverberate back to the first company in the chain of suppliers and customers.

It is very common for one big company going bankrupt to take a number of smaller suppliers with them. This is why debtor management is necessary. 

How can debt management be performed easily?

The one problem with debt management is that it takes time. For a small business, resources are invaluable, and wasting them on chasing after an unpaid invoice can be a very unproductive use of time.

But, by using debtor management software, the time involved in dealing with accounts receivable can be slashed. This type of software makes collections easier and provides a level of automation when it comes to communication.

For instance, when the goods are sent out, the first invoice will be automatically sent to the customer. They will then have a pre-agreed time to pay the money owed. In this example, it is 14 days.

Once the 14 days have passed, a reminder letter will be emailed. This is then followed 18 days after the due date, with a final reminder following 34 days after the original invoice.

After 50 days have passed beyond the original payment date, debt collection processes will begin.

By having this procedure in place and automated, it means that the creditor doesn’t need to worry about sending out invoices and chasing the debt. But, it does also allow them to discover why the invoice hasn’t been paid. 

Keeping good communications with customers

Many businesses choose to outsource their debt management. This takes away a lot of the burden of chasing after accounts receivable, but it also removes much of the personal touch.

It is most likely that any customer who is late paying is having some sort of issue either with the order or with finances. The vast majority of customers are willing to pay, but perhaps are unable to. The problem is when capital dries up, companies get into problems. It has been reported that insolvencies loom large for pubs and bars, and other businesses are in similar situations.

Communication can help reduce late or non-payments and can assist in keeping relationships in good working order. By using debt management software, a business is able to keep track of DSO, days sales outstanding, and monitor unpaid invoices.

When invoices go past their due date, the seller can contact the debtor to discuss the reasons that payment is late. It could be something to do with the order or it could be a problem with the invoice. Debt management and cash collection software reduce the chances of errors, and paperwork going missing. 

How does this type of software help the debtor?

Credit, cash collection, and debt management software from specialist developers such as Payt, allow businesses to not only control their lines of credit but make it easier for debtors to make payments.

Systems such as this have a customer dashboard so that they can see any communications that have been sent and outstanding invoices. Payments can be made through the portal or dashboard, and these will be partially processed by the system. If there is trouble with payment then an extended plan can be set up through the system.

This allows the customer more control over their debts, and makes payment easier, and reduces the need for entering into collection procedures. Involving lawyers and bailiffs can be costly, and unpleasant. Personal and business debts can lead to years-long relationships being irreparably damaged. 

Summary

Recently Carphone Warehouse announced plans to close all Irish stores including 3 in Galway, and it seems that more of this type of news will keep coming. The pandemic isn’t over and the financial damage it has caused is unlikely to fix itself.

For businesses to keep on going this year and beyond, they will need to practice good debt management, control credit carefully, and keep on top of their cash flow. Debtor management software is one way to automate some of these procedures and make it easier for customers to control their own debts and make payments on time.