How to ensure your debtors ledger is accurate and extract cash out of your customers.
Worrells Partner, Ivan Glavas, recently presented "Working the balance sheet: give me my money" as part of our webinar series. It was a timely presentation on the current COVID-19 environment, and how to best position your balance sheet to ensure your business makes it out the other side. The presentation was a review of probably the most important, yet most misunderstood part of a business's balance sheet: its debtors.
We all know that the COVID-19 environment is hitting all businesses hard. It is expected that it will take at least 18 months for the COVID-19 descent to settle and for the economy to return to a growth phase. Businesses must make the most of this time to forward plan, and 'weather' the current climate.
If your business is one of the lucky ones still able to operate under the current lockdown restrictions, chances are your customers aren't. You or your clients will rightly so be looking for ways to improve its cash flow position. One way to do this is ensuring your debtors ledger is accurate and current and converting those invoices into cash.
As insolvency practitioners (as will all accounting professionals), we see a significant number of businesses' balance sheets from a wide range of industries. A common theme within those balance sheets is:
- The debtors often make up a substantial portion of the business's assets.
- Rarely are the debtors accurate or reflective of the actual recoverable balance.
This results in the business's balance sheet looking much better than it actually is. This is a dangerous position to be in, because while there may be some COVID-19 safe harbour protections from insolvent trading and an extension of the six-month moratorium on creditors being able to wind up a company, repercussions on a director's personal liability remain. These include personal liability for:
- personal guarantees
- the Australian Taxation Office's (ATO) director penalty notices (DPN),
- director's duties breaches.
Step one in improving the health of a business balance sheet is to undertake a comprehensive review of the debtors ledger and identify any red flags that should be written off. These include:
- Aged debtors—it's not unheard of to have debtors on the ledger that are 12-18 months old. Consider whether these are recoverable.
- Fictitious accounts / false invoices.
- Debtors simply titled "cash".
- Mysterious debtor-loan accounts (usually booked in for the financial year end, and then disappears a few days later).
- Friends and family loan debtors that do not intend to be repaid.
- Confusion between "work in progress" and debtors.
- Prepaid customers appearing as debtors.
- Factored debtors that are no longer the business's debtors to recover.
- Debtors which are known to be disputed and remain on the accounts.
- No structured debtor recovery process.
Once there's a better understanding of the debtors ledger, step two in this process is to convert your debtors ledger into cash. The following measures should be considered and actioned if appropriate:
- Check your terms of trade and take immediate action.
- Don't automatically extend credit terms.
- Obtain security or a personal guarantee.
- Condition your customers to accept that you don't stand for late payments. Be persistent and follow up, follow up, follow up. A personal and direct contact is your best opportunity here.
- Give options to your debtors to find a solution. Settlements, payment arrangements, discounts, all these options are more cost effective than litigation or liquidation.
- Engage stop supply or cash-on-delivery tactics.
- Outsource the debt collection process to a professional. Yes, there may be a fee, but there is a greater chance of recovery.
- Litigate if necessary, recovery proceedings are a useful tool to settle protracted claims quickly.
- Consider debt factoring / trade finance. Selling your debtors ledger can assist with immediate cash flow but comes at a cost.
- Consider trade credit insurance. If you're worried about the credibility of your debtor, discuss with your insurer / broker your options to insure against that risk.
- Initiate insolvency proceedings (last resort option) to bankrupt or wind up (liquidation). While an insolvency appointment will unlikely lead to a quick and healthy return, the mere making of the application will let the debtor know that you are serious and will often lead them to act swiftly to avoid being placed into liquidation or bankruptcy.
For those familiar with preferential payments, you may be wondering whether the above actions will lead to a liquidator or a bankruptcy trustee's claim down the track. Regardless of this possibility, it's better to have the money in your pocket now, then none at all, as there's no guarantee that any preferential payment claim would eventuate in any case. However, if in doubt, seek legal advice.
While economic times are certainly tough, there's no reason why you shouldn't be paid what you are owed, because if you don't you could end up insolvent instead of your customers.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.