Article
Written by Zahra Saeed
Posted on 06/10/2014

How a robust accounting process can help to avoid bad debt

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One of the biggest problems facing businesses, in particular small and medium sized enterprises (SMEs), is late payments from clients. Delays in settling accounts can cause major cash flow issues, and in the worst cases, can lead to bad debt - money that cannot be recovered.

 

Many countries have legislation in place to compel customers to pay on time, such as the right for a business to claim interest on late payments and charge the client for expenses incurred in debt collection. However, this may not always be enough to ensure payment.

A more proactive solution is to work on building a robust accounting process within your company, and using all the tools available to create an efficient invoicing system that will prevent bad debt occurring in the first place. Here are some ideas to consider:

Be sure to obtain purchase order numbers

In many countries, a purchase order (PO) number, when issued by a customer or supplier, makes the transaction legally binding. Even if this is not the case, not having one can make the payment process difficult and long, especially when dealing with a large enterprise which has a PO system in place. Therefore, take steps to ensure that obtaining POs is entrenched within your accounting system.

Set up a structured email reminder process

Nip late payments in the bud by sending a reminder email a few days before payment is due. Overdue payment emails should then be sent promptly at regular intervals following the due date. Letters should always be polite and professional, and possible penalties should increase in severity the longer the period. Examples of outstanding payment correspondence can be found here.

Consider a cloud-based accounting system 

Take advantage of the latest technologies through investment in a cloud-based accounting service. Software is stored and accessed online, and includes features such as the ability to automatically match payments into your bank account to the corresponding invoice. This can lead to fewer outstanding invoices being overlooked and prevent late payments turning into bad debt. There are plenty of reasonably priced cloud-based systems on the market, so this option will be affordable even to businesses with tight budgets.

By taking time to ensure your company’s accounting systems are watertight, you can avoid wasting time and money chasing debtors and prevent significant losses caused by unrecoverable funds.

 

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