The importance of a robust debt collection strategy for limited companies
Healthy cash flow is the lifeblood of a business. It supports its day-to-day operational needs as well as longer-term growth. Without a strong debt collection strategy in place, however, it is easy for a company to experience cash shortages and difficulty in paying its bills.
The late or non-payment of invoices has a long-term negative effect on a limited company and can lead to a slow financial decline over time – unfortunately, one that is not always easy to spot.
So what are the potential consequences if limited companies fail to deal with late payments and unpaid invoices successfully and what does a robust debt collection policy look like in practice?
Why is it so important to develop strong debt collection procedures?
In addition to harmful cash shortages, the potential consequences of running a limited company with poor debt recovery rates include:
Poor credit rating and reputation
The negative cash flow that results from inefficient debt collection can lead to difficulty for the company in paying its own bills. A poor reputation in the market could follow as a result of this, in addition to a lowered business credit rating and limited borrowing options.
Failure to fulfil its commercial potential
Having poor debt collection processes in place can compromise a company’s strategic plans and make it difficult to fulfil its commercial potential. This has a ripple effect that negatively affects company profits and subsequently the financial rewards available for shareholders and directors.
Personal liability and director disqualification
A significant risk to directors exists on a personal level when their company declines. This is because the legal separation offered by incorporation can be removed if director misconduct occurs, however unwittingly, and a threat of personal liability emerges in some cases. Director disqualification is also a possibility.
Liquidation and business closure
Liquidation is the ultimate threat for limited companies that do not develop robust debt collection strategies. Financial decline can happen very quickly when large sums are involved, but a slow downturn is commonly experienced and that can go unnoticed.
How to develop a strong debt collection strategy
- Clear communication is a key part of effective debt collection. Presenting customers or clients with clear payment terms and communicating the intention to charge interest on outstanding debts is advisable, and these can be included in the initial contract as well as on invoices. Regular reminders and warning letters also demonstrate a company’s strong intention to collect in its debts.
- Offering flexibility in payment methods may encourage faster payment from customers, as can being open to negotiating extended payment periods where appropriate.
- Debt recovery professionals can ease the risk of severe financial instability brought on by poor credit control and debt collection practices. This type of support relieves the pressure on directors and their staff and allows them to focus on moving the company forward.
- Sending invoices as soon as work is complete may motivate the customer to pay quickly as the work is fresh in their mind. Offering a range of flexible payment options also offers convenience and encourages faster payment.
The strategic approach to debt collection for limited companies
Building effective debt collection procedures is critical for limited companies. Efficient recovery procedures protect the business from entering a downward spiral of cash shortages and offer the financial stability that is needed to grow.
Taking a strategic rather than a random approach to debt collection is vital, however. A cohesive strategy lessens the threat and consequences of unpaid invoices and reduces the potential for bad debts to become a significant feature of business performance.
Jon Munnery is an insolvency and company restructuring expert at UK Liquidators, a leading provider of company liquidation services to both solvent and insolvent limited companies.
