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This is not advice. Items herein are general comments only and do not constitute or convey advice per se. The information contained in these articles is for guidance only and should not be relied upon without obtaining professional advice having regard to your direct circumstances.

 

Chasing bad debts a 'waste of time'

Small businesses must manage their debtors better or risk wasting time chasing bad debts, says credit risk information supplier Veda Advantage Ltd.

"Unfortunately most small businesses are unaware of the simple and inexpensive protective measures they can apply to minimise bad debt," said Erica Hughes, Veda Advantage's general manager for information services and solutions.

Ms Hughes said her top two tips for small businesses to improve their credit management were a set credit policy and to credit check all potential and existing customers. She says that if a business creates a credit policy and uses it properly, it lessens the chance of chasing bad debts.

"It imposes disciplines on you, it makes you think about that side of your business," Ms Hughes said. "It's pretty tough running a small business and it's tough chasing customers, so the focus tends to be on the customer and less on chasing up payments."

Ms Hughes says running a credit check is essential for any small business. "... they want to make sure they are chasing the right business and they're not going to get themselves tangled up with people who have a history of not paying debts."

Chasing bad debts can lead to, in some cases, bankruptcy, which has risen among small business in the past year.

"We have seen a rise in bankruptcies," Ms Hughes said. "There has been a nine per cent increase in the March quarter [in bankruptcies compared with the previous corresponding quarter]. Anecdotally, we know chasing bad debts, not being able to get payments for services is a key reason for bankruptcy."

The effort spent chasing bad debts affects a business's cashflow, and the main option to counter this is borrowing more but this leads to additional interest and fees.

"It comes down to a cashflow issue for them as well, and that's why they're extending on their overdraft and drawing up their credit card and eventually going into bankruptcy," Ms Hughes said of small business.

The warning signs for small businesses included being behind in bookkeeping, exceeding overdraft limits and entering into payment arrangements to pay debts, according to those applying for liquidation to the Australian Securities and Investments Commission last year.

May 18, 2007 AAP

 


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