We all love turnover and we all love profit. We spend money and time on advertising, networking and selling and we attend more breakfasts than are good for us. The results are never guaranteed but what drives us on is the hope of winning turnover. But how much time, effort and investment do we commit to keeping the benefit of the turnover we already have?
If you don’t get paid on a particular account then not only do you lose the benefit of that turnover but you have to find a lot more to balance the effect of that bad debt on your bottom line. For example if your net profit is 12.5% then a bad debt of £4,000 represents the loss of the net profit on £32,000 of turnover. This multiplier effect is rarely considered when deciding how and when to chase late payments. This is the first in a number of articles and guides we are publishing to help our clients and subscribers reduce their bad debt write-offs.
In our experience our clients recover 80% of the debts they ask us to collect. The unsuccessful 20% are usually the oldest debts. Delay in dealing with aged debts is common and arises for three principle reasons; the first is that the creditor company has weak credit control systems – an evasive debtor will take full advantage of this. The second is that the creditor company hopes that the money will eventually be paid without the need for any unpleasantness towards a valued customer – but there is rarely a good reason for late payment by a good customer. The third reason is the perceived uncertainty about legal costs – but companies can use the small claims procedure without employing a debt recovery company or a solicitor. By acting quickly they dramatically increase the odds of getting paid.
Even if you don’t feel able to make a claim yourself there are a variety of solicitors and debt recovery companies out there who will offer to collect your debts for a fixed fee or a conditional fee. However, care should be taken when looking at their fixed fees because the fixed fee may only apply to an ‘Undefended Claim’. This means they will charge a fixed fee for filling out the Claim Form and applying for Judgment in default of a defence – that’s the easy part. If the debtor enters a defence then the work really begins and that further work is not generally covered by the fixed fee. The creditor company also needs to consider that conditional fees are recoverable on obtaining Judgment even if the debtor does not and cannot pay the Judgment amount.
An efficient credit control system will, in most cases, dramatically reduce the instance of bad debts. However, an efficient credit control system should escalate debts over 60 days rapidly to avoid the risk of them turning into a bad debt.
We will be publishing a series of guides to debt recovery over the next few months, if you would like them emailed to you as soon as they are published.
If you want any advice about your debt recovery strategy please Contact us
Jonathan Waters is the founder of Helix Law. Before qualifying as a Solicitor he worked in industry and in investment banking for over a decade. He was also the Partner in charge of Commercial Litigation, Employment Law and Property Litigation at Stephen Rimmer LLP. Jonathan has wide experience of helping and advising businesses to avoid or to deal with commercial disputes and in particular construction disputes.
This article is written to raise awareness of the issues it discusses and it may not be updated after it is first written, even if the law changes. It is not intended to be legal advice and cannot be relied on as such. Helix Law is not responsible or liable for any action taken or not taken as a result of this article. If you think the matters set out affect you and you wish to apply them to your particular circumstances then we are happy to give you free initial telephone advice.