Continuing his Business Advice cash flow series, Grid Law founder David Walker explains why writing off unpaid invoices could lead to potentially fatal problems down the line for your company.
When talking about their late payment problems, I often hear business owners saying that the quickest and easiest way to deal with an unpaid invoice is to write it off and focus their efforts on winning new business.
This is a very bad idea and in this article, I’m going to explain why.
For just the one unpaid invoice here and there, you may not notice any long-term damage to your business, but this isn’t a strategy you can rely on. If you do, and this becomes a regular practice, it’s a sure way to compound your problems and leave your business in real financial difficulties.
When you write off an unpaid invoice, you can’t write off a corresponding amount of outgoings. You have already invested time, effort and resources to complete this work and you still have all your staff, suppliers and other overheads to pay.
So, writing off this invoice doesn’t take you back to zero, it puts your cash flow in a negative position because it has cost you money to complete the work.
To compensate for the unpaid invoices you have written off, you need to increase sales.
To increase your sales, you need to increase your marketing efforts and this will no doubt require an increase in your marketing budget. This will increase your overheads before the marketing efforts have generated any results.
Even if you win more work, there’s likely to be a significant delay before the new work is completed and the client settles their invoice. This will put a further strain on your cash flow.
And that’s if the new client is paying on time!
However, we know from experience that they often don’t which is why we started this process.
To ease your cash flow whilst waiting for payment you may try to cut costs, but there’s only so far you can go. If you cut corners to make additional savings, the quality of your services will suffer and this can lead to complaints and clients withholding payments.
The process then repeats itself and starts spiralling out of control as your cash flow is stretched to its limit.
Businesses fail when they run out of cash. Even when things seem like they are going well and you have plenty of work, if you don’t have sufficient cash coming in your business will be forced to close.
This is the greatest danger you face if you regularly write off late payments, so please don’t make this a habit. Instead, you need to deal with the issue by being more selective with the clients you work with and having effective credit control procedures in place. Please see my previous article for a simple guide to effective credit control.
As a solicitor, I’ve seen many businesses suffering from the effects of late payment. I’ve seen the heartache caused when a family business closes its doors for the final time. I’ve seen good, hard working people lose their jobs. And the worse part of this is that most of the problems were entirely avoidable if action had been taken sooner.
I don’t want you to suffer the same fate, so if you have any questions about recovering your unpaid invoices please feel free to email me at firstname.lastname@example.org and I’ll happily answer them for you.
Catch up on some of David’s recent articles:
- How do you decide whether to take someone to court?
- How to deal with fake business reviews that seek to damage your reputation
- The biggest business mistake entrepreneurs make and how to avoid it
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