Bad Debts: a “sitcom”
I stumbled across a new slant on the acronym “sitcom” this week - which stands also, I believe, for “single income, two children, oppressive mortgage”.
Engaging though this acronym may seem, it embodies the undertones of a very sinister reality too –
Three years ago domestic debt stood at approx £1Trillion, after doubling over the previous five years. Figures now indicate that private sector debt, up a further 35% at £1.345 Trillion, has now overtaken UK Gross Domestic Product - we owe more than we make.
Average personal debts now stand at 1.62 times personal income.
The Bank of England calculates that debt service costs have now surpassed their previous peak, set in the early 1990s, when interest rates were much higher than today, and that 7.7% of households are struggling to pay their mortgages. Owners have increasingly transferred borrowing from credit cards to their mortgage to try and make ends meet, which is fine when house prices are rising and interest rates are low - but house prices are no longer rising and interest rates are no longer low.
We haven’t yet entered a period of falling house prices, but a major (and usually bullish) building society reluctantly admitted this week that prices are unlikely to rise by more than ‘wage inflation’ at best next year. But what if house prices do fall?
With wage growth already at a four year low, a tilt into recession remains a strong possibility.
And this is not just a UK problem, as volatility in stock markets across the world reflect the growing unease internationally.
But hey, why the economics lesson?
Because it’s time to issue a warning, especially to businesses in the SME sector. It’s time that you made sure your ‘cash collection’ systems are strong and that the amount of outstanding money owed to you is maintained at an absolute minimum at all times. Deal only with customers who keep their account in order – not only does it show that they respect you, but importantly you minimise potential bad debts and consequent losses.
Don’t get caught
To recover from a ‘bad debt’ of say £5,000 for example, might require NEW sales of perhaps £33,000 (on a net profit margin of 15%) – not an easy task at the best of times, let alone in a recession.
Lets not beat about the bush on this one.
Cash critical. Without cash you can’t pay your suppliers – and without suppliers or labour your business is ‘dead in the water’. Cash is the life-blood of your business – the very substance that keeps it going. And having cash to hand is the only way that you will survive recessionary conditions when they arrive.
So be prepared. And if you need any help in improving, designing and implementing cash controls, you know where to come – just give me a call.
Now, go make some money the smart way!
Doctor Richard C.
PS
Your new policy on debtor management could also
be ‘sitcom’ – ie
for a “Secure Income, Take Cash, Otherwise Misery”
PPS
I am in the process of writing a ‘guide to cash survival in difficult times’ (title still to be decided) so keep in touch if you would like a copy.
August 30th, 2007 at 10:38 am
Hi Richard
Never understood those trades who ’subsidies’ materials for their clients and have absolutely no Terms of Payment in place!
A local plumber friend of mine always grumbles he has cash-flow problems after paying for his ‘bespoke’ bathroom suites upfront. His client pays his total bill after all the works are finished.
When I suggest he puts different terms in place - e.g. materials and profit on those materials on delivery, ‘labour’ costs on completion - the answer is always the same:
“But that’s not the custom in my trade!”.
Being in debt apparently is
Karin H. (Keep It Simple Sweetheart, specially in business)
August 30th, 2007 at 10:53 pm
Brilliant and timely! I plan to share it with some of my clients.
Kent
September 19th, 2007 at 2:39 pm
Hi Richard,
I couldn’t agree more with your comments on bad debts. I am amazed at the number of business owners who do not place enough importance on credit control. They seem to think that sending out the odd statement here and there is enough to recover their money (you and I know differently). In my view business owners put far too much emphasis on “sales” (Turnover). It doesn’t seem to matter whether or not they receive the monies off of the back of the “sales” - a ludicrous situation.
What do they say “turnover is vanity and profit is sanity” Were I in a situation where my turnover had doubled but profits had halved due to a high incidence of bad debts, I would rather walk away from customers that didn’t pay me on time (effectively reducing turnover) and focus only on those customers that do pay on time - I guess this means that I am sane?
Karin, I like your comments too - this is another scenario that I have come across time and time again - to me the answer is very simple; collect as much money upfront as you can. Irrespective of what industry or trade you are in, if you can properly justify to your customer why you are asking for money up-front - they will not question it. Put it this way, if you give your customer a whole different range of payment methods, most of them will elect to pay you by BACS or cheque - this keeps them in control of when and if they pay you. If you push for cash up-front, or payment by Direct Debit or Standing Order, I guarantee that your customer will agree (Rather than asking questions of your customer when it comes to asking how they wish to pay, try telling them (nicely of course) that you only accept payment by way of Direct Debit, Standing Order, or cash up-front) I know for a fact that this works, as, all of my customers pay me by way of Direct Debit! I simply don’t give them a choice.
Jamie O “Making Your Cash Flow”
September 19th, 2007 at 2:52 pm
Hi Jamie O “Making Your Cash Flow”
I hear what you’re saying and can tell you we - at Wood You Like - have very strict terms of payments in place. Like you say, our clients agree with them and understand them because we explain it to them (verbally, on quotes and on order confirmations - so most ‘hear’ them three times!).
We’re very strict: no first payment? No ordering of materials i.e. no order. (We don’t ‘count’ ourselves rich too, only consider a sale a sale when the first payment is received. Received through one of the three options we give the client.)
Karin H.
September 19th, 2007 at 3:48 pm
Glad to hear it Karin!
Jamie O “Making Your Cash Flow”