The finance team is ultimately responsible for monitoring the financial health of a business and should have the necessary processes, policies and visibility to nip bad debt in the bud before any serious damage can be done.
However, while this responsibility lies in a central finance team, it’s often the case that your staff are equipped with the means to spend the company’s money and make deals with customers, making it difficult to keep financial affairs within the finance department.
With costs being cut and “profit” on the lips of every MD, here are some pointers on making debt a company-wide concern to help keep your cash flow on track.
- Educate your workforce: Bad debt affects your profit and loss which will affect their salaries and, ultimately, their job security. Make sure employees understand their role in creating a sustainable business.
- Keep your collective ears to the ground: Is a customer’s business heading for trouble? Is there a supplier who persistently delivers late, incurring fees customer-side? Has your usual customer contact vanished without a trace? These could point towards the possibility of a sinking ship that could cause payment issues down the line.
- Avoid information overload: Your staff shouldn’t be expected to understand a load of financial jargon and spreadsheets full of figures. Don’t blind-side them with detail, instead make sure your software can make financial information easy to digest at any level, from the sales team through to the CEO.
- Give staff a 360-degree view of their customers’ accounts: Does your CRM system link through to finance and enable problems to be flagged? Everyone who pulls up a customer record, like taking a sales order, should be able to see at a glance the customer’s track record and credit-worthiness – or otherwise.
- Review client profitability: It may be that some customers pay eventually but only after an uphill struggle and constant chasing on the part of your credit controllers. This eats into your profit margins and if not set straight early on, is likely to be a persistent problem. Make sure your finance department shares these tales of woe with the wider team as they may be able to encourage more prompt payment from their customer base.
- Communicate “rules of engagement” to all staff: Put your policies in writing and circulate them regularly to staff, making it clear what their role is in tightening the noose on bad debt. Selling to customers – even existing customers – without checking their account and credit status should be a strict taboo.
- The power of the PO: There is no such thing as a “gentlemen’s agreement” when it comes to business, especially when it concerns money. Make sure your team live and breathe by purchase order numbers as an order or agreement without one is worthless.
- Use cash flow as a business intelligence tool: Good cash control management and software can go much further than just tracking who owes what money where. It can show you where the cash drivers are in your business, who is performing well, where red flags should be going up and other events that could threaten but also boost profitability.
Poor cash management impacts your own working capital, eating into the amount of money you have to invest in the business and affecting your ability to pay off your own debts. The longer a debt is outstanding, the greater the risk of the company going out of business and the greater the cost of resolving and recovering the debt.
By making bad debt a company-wide concern you can make sure that you not only get your customers’ money into the bank but also ensure it stays there.
Paul Sparkes is product director at IRIS Accounting & Business Solutions.
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