5 Ways to avoid bad debts for SMEs

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5 Ways to avoid bad debts for SMEs

Bad debts are those debts that are labeled as unrecoverable. Often there’s a credit period that is given to customers within which the sellers expect the customer to pay them whatever is due. Sometimes, customers fail to pay within the credit period. These may have to be finally written off in the seller’s accounting books. Frequents cases of bad debts may cause huge losses to any business. Bad debts must be avoided whenever possible as they may affect the cash flow of a business.

Avoiding bad debts and recovering payments is possible when there is a protocol or step by step action plan that when followed may result in better and faster payment recovery. The reason for bad debts may not always be due to a bad customer, sometimes payment is not recovered in time due to disappointing service, unavailability of suitable payment options, customers forgetting to pay, etc. While we cannot control everything, we surely can take active follow-ups so that the customer never forgets about the pending payments. We must ensure we deliver the top quality product/service as promised and provide suitable options for modes of payment. This will reduce your bad debts substantially.

Below are a few steps or tips on how you can ensure you never get stuck with bad debt.

Create loophole-free policies

Businesses must have a pre-defined strict credit policy for their customers. The policies must be communicated to every customer while the credit period is requested. The policy must be clear and well-understood by both parties. This will ensure, there remains no room for misunderstanding and clear terms and conditions are communicated. The policy must state the credit period that can be offered, who qualifies for a credit, the methods of payment recovery, and the consequences in case of bad debt.

Advance partial payment

This is a common practice and is even more important in a credit period case. There are higher chances of a payment recovery when an advance partial payment is taken at the time of a deal.

Prompt invoicing

Ensure you send invoices as soon as a deal is done. Also sending invoices timely, to remind customers is important as this will help the customer plan in advance for the payment that will soon be due. This is a practice successful businesses do to ensure timely payments are made. You can automatize this process in your accounting software and send email follow-up reminders. Tally too is being used to send outstanding reminders to all customers whose payment is pending. Click here to check out One-click Outstanding management in tally.

Clear terms of payment

The terms and conditions of the transaction must be clearly stated in the invoice as well as it must be communicated to the customer. This is to avoid misunderstanding or resentment in the minds of the customer. The date of payment must be mentioned in the invoice.

A follow-up procedure

You must have a clearly defined process to follow up with customers. This is necessary as a lot of unnecessary follow-ups can spoil your relation with customer and a lack of follow-up may end up in you losing your money. This it is important to have a procedure. You must set a date for the next follow-up and ensure it is done without fail. Similarly as and when decided you must follow up either through mail or messages or calls. Tally too empowers you by providing you with the option to send bulk outstanding emails from Tally in one go. Click here to check out One-click Outstanding management in tally.

Making a strong credit policy, taking an advance partial payment, sending invoices immediately, keeping a thorough follow-up procedure will ensure there is regular cash flow in your business and will lower the burden of follow-ups to a large extent. Outstanding payment management is the key to unlock a businesses’ potential and ensure a continuous flow of money in the organisation.

Unnecessary expenses can also be considered a bad debt to the company. There are less to no returns to a bad expense. Businesses must evaluate their expenses and ensure they automate processes to reduce the long term cost involved and optimize to save better.

Accounting teams can automate processes like the signing of invoices with a digital signature. Sending out GST reminders is another time-consuming process that can be automated in Tally. Similarly, different processes can be automated to save both time and money.

In this way by improving your processes and saving money, by taking precautionary measures and by timely follow-ups, you can ensure smooth cash flow into your business.

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