How does bad debt impact a business?
Businesses rely on income received from sales to pay off their expenses and other company operations. However, in every organization, there’s some uncertainty of debtors not paying dues because of an unexpected liquidity crunch. Especially during the pandemic when many businesses have faced losses, bad debts have become common across every industry.
An increase in bad debts has various consequences. They are:
- Difficulty paying business expenses: An increase in bad debts can sometimes lead to a serious cash crunch, making it challenging to pay day-to-day expenses like mortgage interest, insurance, utilities, repairs, etc.
- Payment to suppliers: Businesses need to pay suppliers or creditors, and bad debts lead to negative cash flow, further leading to late payments. Doing this can harm the supplier-buyer relationship.
- Increase in working capital requirement: If a business does not receive cash smoothly, it will need to borrow from outside in terms of an overdraft, loans, etc. Long-term lending eventually leads to taking up working capital loans with higher interest rates that may cause a cash crunch in future.
- Increase in losses: A money once turned into bad debts is equal to the money lost. An increase in bad debts leads to an increase in losses and hence affects the business’s profitability.
However, to help a business control bad debt, ZikZuk’s Business Finance Manager has come up with various measures. They are:
- Credit control
For any client or customer, a business can set a credit limit, and if once crossed, it will trigger and show the same on the system. This helps the business to limit the losses by keeping a check on the credit provided to them.
- Aging analysis of debtors
Aging analysis list down unpaid customers with ranges. For e.g., you get a separate view of overdue invoices which are 30 days old or less, with invoices above 31–60 days old and so on. This categorization helps the businesses to analyze debtors better.
- Reminders/Communication
Reminders are critical in decreasing the chances of bad debts. And hence, on a set due date, ZikZuk BFM, which gets your Tally data on mobile, sends automated reminders to customers to clear their payables. This not only decrease the chances of bad debts but also will help in recovering cash early.
If you want to discover the best solution to keep your bad debt risk to a minimum, visit Zikzuk BFM, a business intelligence platform to learn how we can help your business run smoothly.
Source — The impact of bad debts on an sme
