MT Expert- Finance: What every FD should know about debt

Chasing monies owed is a time-consuming business - but don't give up, says Stephen Ward.

by Stephen Ward
Last Updated: 15 Apr 2011
Here in the UK, the weather takes the rap for everything. Bad retail figures? Blame it on the snow. The transport network collapses? Leaves on the track because it's too windy. The bad weather was even blamed for an increase in the number of days SMEs wait for payment, according to latest analysis from Experian. This showed that in the last quarter of 2010 SME’s waited on average a whopping 25.7 days for payment, up from 22.58 days for 2010 as a whole and making it the highest recorded average since Q3 2007.

At Daniels Silverman we have heard every excuse in the book for withholding payment. The most bizarre was from a remembrance garden that blamed a shortage in deaths. The most common reason is simply that they are waiting for payment from their client. It is this cyclical late payment culture that hampers SME growth.

As an accountant, and having worked for a number of SMEs, I thought I was pretty clued up on credit management. That was until I joined a debt collection agency where credit control is the priority. SMEs are not using all the tools available to them to make informed decisions when giving credit. It’s not as simple as sending a statement and following up with a letter or call as the following list highlights:

• Make sure you perform thorough credit checks when providing credit. We recommend checking out directors personally and asking for personal guarantees if there are irregularities. Don’t be afraid to ask for bank and trade references too.  

• Act quickly to iron out any disputes. Effective credit control processes and clear customer guidance can help ensure potential payment problems are addressed early. Good practice in this area includes prompt invoices, accurate statements explaining exactly when payment is due and regular liaison by phone when payments are late.

• Credit limits must be reviewed regularly. This should include follow-up credit checks. Watch out for signs of fraud – we often see cases where a company has placed a few small orders and paid with cash and then asked for much larger credit orders before absconding or becoming insolvent.

• All employees should be aware of the importance of credit control. For example front facing staff such as sales personnel who visit clients’ premises can provide valuable insight into how well a business is doing. Are they busy? Do they have good stock levels? What cars are parked in the car park?

• Don’t stop chasing. Many SMEs are not aware they have six years to pursue debts even if they have been written off. And even if a debt has been written off, it is worth continuing to chase the debt, if collection is subsequently successful any VAT claimed can be repaid.

As a last resort, if a business is withholding payment we find the threat of insolvency is far more effective than a County Court Judgement (CCJ). The majority of debtors are so worried about formal insolvency proceedings that in the majority of cases they pay up and there is no need to follow up with an insolvency petition.

SMEs can run up huge legal fees through solicitors trying to secure and enforce court judgements. The average time for a small claims hearing (under £5,000) to take place is 31 weeks, which coupled with solicitors fees is far too long. To make matters worse, many debtors are no longer afraid of a CCJ being registered against them so even when a creditor is awarded judgement in their favour, there is no guarantee that they will ever recover the money owed to them.

Finally, don’t give up - unless a debtor is in bankruptcy or liquidation and only then if all their finances have been checked to ensure there are no dividends to pay out. It'll be worth the perseverance in the end.

Stephen Ward, finance director at debt collection agency Daniels Silverman

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