Getting the money in painlessly
Cash flow is the lifeblood of every business and that is why companies need to recover any debts they incur quickly and effectively. Mike Jenkins explains how.
Hard-pressed small and medium-sized companies are failing to recover a staggering £50 billion a month in debts, according to some estimates. Even assuming a low commercial interest rate of 2%, this means that bad debts and late payments are costing SMEs around £12 billion a year in interest payments alone.
A failure to recover debts efficiently creates significant cash-flow problems by draining much-needed finance from the business, a serious threat to a company’s survival. Indeed, complications with cash flow are to blame for more than 80% of business failures, according to research by business information provider Dun & Bradstreet.
Cash-flow problems can be mitigated by reducing debts, making debt recovery a critical business service.
Once they have exhausted all other avenues to recover debt, such as reminder letters, creditors essentially have three options left.
• Litigation — in other words, court action.
• Insolvency proceedings.
• Alternative dispute resolution or ADR (typically, dispute resolution that does not involve going to court).
Court action and insolvency proceedings usually demand that the dispute is heard in a public forum by a professional judge.
ADR, on the other hand, traditionally involves a confidential forum in which a technical expert with expertise relevant to the dispute sits as the judge. ADR can therefore preserve pride and commercial relationships, and offers scope for more flexible settlements.
However, if your business is forced to consider litigation to pursue debtors, you need to ensure that your company is well protected. To this end, leading debt-recovery firm McClure Naismith recommends the following steps.
• Review trading terms and conditions to ensure that they are as effective as they should be, particularly regarding payment.
• Incorporate terms and conditions into invoices for goods or services you issue.
• Ensure accurate administration so that invoices correctly describe the intended recipient to ensure the best prospects of recovery.
• Chasing outstanding debts can be time consuming. Once it becomes apparent that a debtor does not intend to pay, instructing solicitors to pursue the debt is an effective way of freeing up time to engage in more productive activities.
To make the debt-recovery process more manageable, the HVCA has negotiated a bespoke service tailored specifically to mechanical-services contractors at discounted rates.
This service, developed through an alliance with McClure Naismith, offers advice about the most cost-effective and speedy forms of recovering debts and will represent you in proceedings.
The HVCA has also produced a guide, which sets out options and procedures available to members pursuing debts. For example, there is guidance on the action members can take before starting proceedings, as well as help with the options available through the courts and alternative dispute resolution.
To avoid the cost, hassle, effort, wasted time and stress associated with trying to recover debts, it pays to avoid incurring them in the first place — meaning that it is good practice to employ effective credit checks.
It is sound advice to perform credit checks on your customers and suppliers in any economic climate; in a recession, this activity becomes essential. After all, knowledge is power. As McClure Naismith points out, having an idea of the economic prosperity of your clients can influence how much credit you extend to them and can also mean an informed decision can be made as to the potential value of raising court proceedings if debts should be left unpaid.
To find out about the credit worthiness of potential clients, the HVCA has negotiated discounted rates for its members with Experian, a top global information services company, to provide credit reports on organisations.
This is just one of many commercial services available to businesses through the HVCA and its group of companies. More details can be found at the HVCA Business Plus website, www.hvcabusinessplus.co.uk, or by phoning 0800 9171541.
Mike Jenkins is business development manager of Welplan and group co-ordinator of HVCA Business Plus.
