We are conducting preliminary examinations into the reasons for the insolvency of a company to which we were recently appointed liquidators. The explanation from the director – bad or uncollectable debts – partially coincides with our findings. But a bigger problem appeared.
The company was a specialist mechanical engineer and only had a small range of clients, but sufficient work from those clients to keep the staff busy and to make reasonable profit from its efforts. At the time that we were appointed, the major customer owed the company the equivalent of 30% of its yearly turnover.
I say the director’s explanation partially coincides with our finding because the debt to this customer was not bad or uncollectable, it just was not collected. We simply demanded that it was paid and are now collecting it. By the time that we were appointed, the debt had grown so large that the debtor could not pay it all at once and we have entered into a repayment arrangement.
Back in 2009 we wrote about debt collection policies as part of a series called “Four Lesson”. This lesson relates exactly to the position in the current case. If the debt had been paid regularly, or even if a repayment agreement had been entered into earlier and the company better controlled the amount of future work for this customer, the company’s financial position may have been very different.
Many directors have a number of what they believe are very good reasons for not chasing debtors: not wanting to upset their good clients, not wanting to appear to be desperate for money, not being the kind of person that likes asking for money, etc. In this case there was no good reason. The director did not have any reason not to demand payment and take some proactive steps to arrange or force payment, he just did not do it.
We ended the 2009 article with the statement “Businesses need to collect their money”. That statement has applied for many hundreds of years and will keep applying for hundreds more.
I have reproduced the 2009 below. Go to the Insolvency Articles area on our website to read about the other lessons.
Four Lessons – One: Collect Your Money
Cash flow is the life blood of any business. Small businesses in particular are usually not well capitalised and rely on a steady flow of money coming into the business to meet the basic commitments. Cash flow rarely just happens by itself, and without the money coming in, money cannot continue to go out. So the first lesson is ‘collect your money’.
RBP Pty Ltd was a small family plumbing business. It handled small domestic plumbing jobs (fixing leaking taps etc.), fitting out domestic construction projects, and doing some larger commercial work. But the company became insolvent and we were appointed. The company had no money in the bank and a lot of unpaid creditors. But it had sufficient work to keep several qualified plumbers busy all of the time – in fact they were looking for more staff to handle the increasing work load. The director believed that he quoted reasonably well and was certain that the work was profitable. But there was no money and lots of bills.
As we examined the figures to determine whether we could continue to trade, we questioned the turnover (sales) figures as they seemed low. The response from the office staff was that the computer system did not show the completed jobs as sales until they had been invoiced to clients – and that had not been done for a while. How long? It had been a ‘few’ months since any invoices were prepared or issued to clients. How long is a ‘few’ months? Somewhere around ‘quite a few’.
It turned out that they were so busy getting work in, organising the work to be done and actually doing work, they never quite got around to billing the clients. Our first task was to get the office staff to prepare and issue invoices for all completed jobs going back over the ‘quite a few’ months – and there were lots of them. Unfortunately, given the time period between doing the work and trying to invoice it, some of the paperwork was lost and some jobs simply could not be invoiced.
We then had to collect the money. We looked at the debtor’s ledger and noticed that it contained a number of older amounts owing that had not been collected. The director advised that there were no disputes, he had dealt with these clients for years and that the amount was collectable. Why hadn’t they been collected? These customers usually did not pay until the director had called them personally and asked for payment. But the director was busy working and did not want to call in case he upset the client by asking for money and lost their work. Obviously that had to change.
It turned out that the company could not be saved, but during the course of the appointment we managed to collect over $260,000 from debtors and pay a substantial dividend. Any small business losing that amount of money from cash flow will suffer greatly. The fact is that it could have been avoided simply by invoicing clients regularly and having a debt collection policy.
Businesses need to collect their money.