The right moves: If you drop your guard on debt collection, you'll pay a heavy price
Just as markets seemed to be recovering from the era of insolvency, the liquidation of construction group Carillion, the examinership of Irish contractor Sammon, and a ripple effect for Irish sub-contractors, reminds us how vital it is to protect yourself against debts going bad. In any downturn, how you manage credit, could be the difference between the survival and the death of your business.
One would have thought that the catastrophic losses suffered in the last collapse would have guaranteed that nobody would take chances with their credit management again. But human nature is a powerful thing. Business people are entrepreneurs, they take risks - they are 'glass half-full' people. With business and the economy improving quickly over the last few years, it's tempting to get caught up in the rush to win more business and boost profits.
This is very easy to understand. As an estate agent, you are sales-oriented and there is a huge emphasis on winning new clients. The thrill is in doing the deal, and there is nothing more boring than going through pages of aged debtors at a monthly meeting with the accounts department.
From my experience, some individuals are better at debt collection than others. It often takes being stung a couple of times for an agent to realise that all that work you do in winning the client and doing the deal is worthless, if you don't get paid. In fact, it's worse than that, because you could have been doing something else and getting paid.
This is where it's vital that experienced staff train their juniors in how to balance the push for business, with good credit-management techniques. It's all about being well organised and the people and departments that suffer the worst losses will usually be those who didn't get Terms of Engagement signed by the client, those who have patchy records of agreements with clients on expenditure, and the ones who make mistakes in raising invoices.
Every firm should have a monthly meeting between those raising invoices and the accounts department, to review why invoices aren't being paid, and what needs to be done. The accounts department must keep an overall eye on the firm's cash flow so they can spot where the firm has built up too much overall credit with an individual client or sector.
I asked an expert in the area, Stephen Scott, a director with Smith & Williamson, Chartered Accountants for advice. He told me that the key to an effective credit management policy is do the basics well at each stage of the process. This starts with a proper evaluation of new clients, efficient invoicing and follow-up procedures, having systems that identify bad debts and taking appropriate action, including legal remedies, to recover funds.
He advises against having a very large proportion of your turnover concentrated on a small number of clients, which can allow those clients to begin dictating credit terms. Firms must establish clear credit terms and have a robust collection policy. Companies may offer discounts for fast payment, which reduces capital and administration costs, but this is expensive.
Other ways of reducing risk are to take out credit insurance, reserve title on stock or designs, train staff in the soft skills around collection, get personal guarantees, enforce judgements and to make debt collection a team effort, as opposed to being left to the accounts receivable clerk.
Tom Parlon, Director General of the Construction Industry Federation (CIF) told me that "these are dangerous times, and so it's essential for contractors to have their paperwork in order" for the debt collection process. CIF provides training for its members, but Parlon believes that some sub-contractors are unfamiliar with it. The Act provides for contractors to be paid monthly and entitles them to withdraw labour in cases where they are not paid.
Tom Parlon attributes much of the blame for a spate of insolvencies to poor procurement processes by government. He estimates that work is currently stopped on dozens of schools in Ireland because contracts are continuously awarded to contractors who don't appear to have the financial capability and are not paying sub-contractors. "The apparent lowest price is often a false economy" he said. "The kids, parents and sub-contractors pay the price."
When it comes to debt collection, my advice is to hold a very strong line. You'll lose few clients and most will respect you more for it. Don't end up paying for other people's problems.