Money Management

Managing Accounts Receivable in a Declining Market

Insufficient or declining sales is something that every proprietor or company director will experience at some point in the lifecycle of the business.

When sales begin to slide, you may find that you are no longer in a position to cover fixed costs. Without foresight and forward planning, many businesses panic and make reckless business decisions.

No one is immune to a declining market. The surge of online alternatives to traditional business has exposed all business to risks, including risks of liquidation they never thought they would encounter.

Some industries have changed beyond all recognition in the last ten years alone. Think of the challenges now facing traditional bookstores, newspapers, many printing supply companies.

Inability to control expenses coupled with operational inefficiencies can have an almost immediate impact on the tight margins that many businesses now operates within.

A business with comparatively high rent, labour and material costs will often struggle to compete and survive with many of the newer models forming in digital business.

The tips that follow are aimed to address those in business who are in – or likely to find themselves in – this position.

Unfortunately, many businesses will be fatally wounded by declining or transforming markets and forced to liquidate.

Others, those with a model that allows for quick change and flexibility, however, can move with the times and adjust their financial management systems to meet the challenge.

Handling Your Accounts Receivable

While much of the problem lies in the markets themselves, there are plenty of things that small business can do to mitigate the effects.

One of those has to do with the management of accounts receivables, also known as the debtor’s ledger. Getting paid for the supply of goods or services when they’ve been fairly provided is a perfectly reasonable expectation.

But the truth is some people will always find fault or make excuses to avoid paying up.

Offering Terms of Credit

If you’re going to offer credit terms, you need to do whatever you can to protect yourself and improve your prospects of debt recovery and therefore business survival.

Most accountants will recommend you have your lawyer prepare credit applications and other forms to ensure that they are drafted in your favour.

Kym Butler of Butlers Business and Law writes in, “Profit Boosters for Business”,

“If a business is dealing with the same type of transaction, generally at low cost, it may be sufficient to issue the same agreement with the same terms of trade to every customer.

When it comes to more valuable transactions, however, failure to be

cautious when entering into supply relationships can result in disastrous consequences if you unknowingly agree to unfavourable contractual terms.”

Your credit application forms should (at a minimum)  include:

  • A personal guarantee of the director requesting the credit
  • A charging clause that would give you the right to lodge a caveat on the personal property of that director, and,
  • A properly drafted and registered retention of title clause that would enable the collection of your stock in the event you are not paid.

Apart from this, and before doing any business whatsoever, you need to do your own due diligence on each trading partner you are thinking of doing business with.

You and you alone should decide who is worthy of your credit and therefore it is you who is responsible for:

It’s important to undertake credit checks using directorship searches through ASIC or through commercial credit agencies so that you have a complete history of those you are working with.

There may even be occasions when you need to conduct property searches of the company directors to determine who owns the assets so you can develop a credit application to suit those particular circumstances.

There are occasions where no matter how diligent you are, You will learn that there are no available assets and that you will be taking a commercial risk if you offer that client any credit.

When periods of downtime come in your market or periods of decline in your industry, you need to have in place credit limits and procedures to deal with these kinds of accounts in order to diminish the influence of the downturn in your market.

Having your financial procedures and records in place using good financial software is far and away the best mean of keeping track of these transactions.

There are no doubt many other ways you can manage periods of decline in your industry.

But, in order to ride them out, having a procedure in place for your accounts receivable, one that is able to deal effectively with debtors, will go a long way to ensuring your business remains afloat.