Tax & admin · 27 March 2019

Bad debt: 8 survival tips to evade the SME killer

business insolvencies
Bad debts are bad news

As new figures reveal that bad debt is contributing to an SME insolvency boom, we reveal eight survival tips to help business owners boost their cash flow.

According to Consultancy.uk analysis of figures from the government’s Insolvency Service, insolvencies have risen by 20% over the last three years, since a decade low in 2015.

Construction (3,940) and retail (2,608) were among the sectors with the highest number of business insolvencies in 2018, and experts have claimed that Brexit uncertainty has already impeded the performance of UK SMEs and would continue to do so. Meanwhile, a cocktail of business rates hikes, pension enrolment and unsecured debt was placing firms under financial strain.

Source: The Insolvency Service

Non-invoice payment by customers, known as bad debt, is a hazard almost all businesses are exposed to. “Bad debts are bad news,” writes our bookkeeping expert Emily Coltman, “because they mean your business has less cash than you planned for, and may not be able to afford to pay its own bills. In the worst case scenario, bad debts can make you go out of business, too.”

Todd Davison, director at SME insurer Purbeck, explained why bad debt was such a common risk for business owners and directors.

“Running a business is a worrying business at the best of times,” he said.

“The financial burden is often shouldered by the directors of SMEs who have put their personal assets on the line.

“In a survey last year among 250 UK business directors, nearly half said they had a Personal Guarantee in place to secure finance for their business. While Personal Guarantee Insurance can help protect a director’s personal assets in the event a loan is called in – business owners should seek help and advice before they face that situation.”

Davison offered SMEs his eight survival tips for avoiding bad debt and keeping your business in the black.

Purbeck’s bad debt survival tips

  1. Plan

Take time to generate a business plan to identify your core values and how you differentiate your business from competitors. Be mindful that things don’t always go to plan and it will evolve over time. Diarise to revisit the plan every 3 months to benchmark your progress and update your plans as necessary.

  1. Numbers

Keep close to the numbers, take time to monitor cash-flow and budgets. Consider using an external advisor such as an accountant to help. There are online cloud-based accounting solutions that link to your bank account; providing real-time financial oversight and control.

  1. Efficiency

Focus on the tasks that add-value to your business; put yourself in a position so that the business gets the best out of your capabilities and skills. Consider delegating certain tasks.

  1. Keep calm and carry on

You can often be faced with difficult or emotional decisions – don’t be rushed into a decision; take time to consider the alternatives and be positive in your convictions.

  1. Wellness

Don’t lose focus on why you get up in the morning and try to maintain a proactive work/life balance. Spend time with friends, family, eat well, exercise and recuperate. Wellness and maintaining a healthy mindset can help to make you a more effective director of your business.

  1. Diversification

Reduce your reliance on any one revenue stream or customer. Seek ways to access alternative income and from multiple sources.

  1. Organisation

Put in place robust processes, governance and oversight measures to control your business and its growth.

  1. Ask for help

Don’t be afraid to seek professional advice if you are outside of your comfort zone; many advisors are there to help you make informed decisions to work towards your strategic aspirations.

 

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ABOUT THE EXPERT

Praseeda Nair is the editorial director of Business Advice, and its sister publication for growing businesses, Real Business. She's an impassioned advocate for women in leadership, and likes to profile business owners, advisors and experts in the field of entrepreneurship and management.

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