We have written a number of articles in past e-Updates that focus on the record keeping skills (or more usually lack of them) of some business owners. These previous articles have looked at this problem from a variety of views – an inability to track the true trading position of the business and determine profitability or otherwise, the inability to determine whether a business is insolvent or not, and the inability to trade effectively and efficiently.
This article highlights one area of the latter, specifically the collection of monies. We focus on the issues that we encounter once the business is in the hands of an insolvency practitioner, but the same issues will be faced by the business owner.
Many businesses sell their goods and services on credit. This means that we are often appointed to businesses that are owed money by other parties and must go about the business of collecting that money. Sometimes this task is relatively easy. Many customers know that they owe the money, know exactly how much they owe and when it is due, and pay that amount.
But sometimes collecting monies due is not that easy. Customers may dispute that any debt is due for a variety of reasons, or they just may think that they may get away with not paying if they put up sufficient resistance given that the creditor is insolvent and therefore has limited resources to enforce payment. It is collecting money against this resistance that requires good records. And this is where we often have problems thanks to the lack of records kept evidencing debts.
Debts that relate to the sales of goods are generally easier to collect than debts relating to services. If we can show that a physical product was handed over or delivered we have a more solid basis to prove that a sale took place and value was passed. There is a tangible basis to the debt.
Debts that relate to the provision of services are more problematic. There is no tangible part to the ‘sale’. Without proper records on what has been done and the costs involved, it can be very difficult or even impossible to show what amount should be due.
So what have we found?
This is not a new phenomenon and here are some examples from current files which highlight the types of problems we have encountered over the years when trying to collect trade debts:
1. We are the liquidators of a medium sized transport company. The debtor’s ledger is incomplete, unreconciled and confusing. The invoices generated in the company’s MYOB system contain very little information, and many of these invoices are made out to customers that cannot be identified with any registered legal entity or recognised customer.
The managers of the transport company apparently never felt the need to insist on those seeking credit lodging a detailed credit application. Orders, delivery dockets and other supporting documents are at best haphazardly filed and, as often as not, not filed at all.
It may be that the transport company has debtors in excess of $200,000 over at least 100 debtors, but in most cases we will be unable to commence recovery proceedings because of the lack of documentation. On the positive side, every so often we receive a cheque in payment of an account which does appear on the ledger at all.
2. We are also liquidators of a commercial plumbing business that had a number of ongoing contracts, including in some instances, multiple contracts with the same developers. Some of these contracts had not been completed at the time we were appointed. It is clear that the plumbing business was owed at least something for work done, but further works were necessary to complete the contracts.
The company kept no up to date records of what work had actually been done (and the value of that work) and what work was necessary to complete the contract (and the cost of that work). Essentially the company relied on its contract supervisor “knowing” the true position but did not require that he keep detailed contract records.
Not surprisingly the developers are not particularly forthcoming with information which shows the value of unpaid work done by the company. They are very forthcoming with lists of rectification work that is allegedly necessary and lists of costs that they want to offset against what may be owed. These allegations are almost impossible to counter without proper records. Many tens of thousands of dollars are involved in these claims.
3. We are trustees of a bankrupt who ran a small printing business. At the time of the appointment there appeared to be a substantial amount of money due for work done. The invoices themselves were well prepared and had most of the supporting documents. But many of the customers had already paid their debts. The payments were just never updated onto the system. Very few were actually outstanding.
4. We are liquidators of an electrical business. Two problems were uncovered when we were appointed. The first was that a majority of the work done over the last eight months had not been invoiced to customers. The director knew that money was tight, so let his office manager go to save costs. Unfortunately no one took up the task of preparing and dispatching invoices. To compound the problem, the office manager was also responsible for collection of debts.
It became necessary for us to issue invoices some of which related to supply eight months previously, when we had sufficient information to do so, and chase old invoices with little information available.
Creditors sometimes get very annoyed with insolvency practitioners when they write off (sometimes very large) debts as uncollectable, knowing any non-collection affects the amount of any potential dividend. The issues mentioned above are just some of the difficulties faced when attempting to collect amounts due to insolvent entities. Without proper records, it is not surprising that many amounts simply cannot be collected.