Mates - a cautionary tale about debt and debt management

Debt & Debt Management

Debt and debt management seems to conjure up images of dread and sometimes this is for good reason.

Dun & Bradstreet have recorded that invoice payments are reaching a record pace in 2015, with average payment dates being 50.4 days Australia-wide and 53.3 days in the ACT1. That is a significant amount of time for businesses to be exposed to a reduced cash flow and reduced profit margins while seeking to maintain a strong financial position and grow their business.

There are three aspects of debt and debt management – the good, the bad and the ugly. The discerning business owner should understand and develop a healthy respect for all three, from proactive debtor management to the risks of insolvency and ‘stick’ of director liability.

Two of the statistics by Dun & Bradstreet’s recent report are particularly revealing:

…46 per cent of businesses would choose to miss a payment to a trader supplier if without enough money to cover all of their expenses. …34 per cent of businesses have had a customer or supplier become insolvent or otherwise unable to pay them during the past year.

A person or entity is insolvent if they are unable to pay all of their debts, as and when they become due and payable2. With 44%3 of commercial invoices in Australia being paid late, a large number of businesses are at risk.

Bad debt management can cause your business to suffer financial constraints which, if not dealt with early and effectively, can also lead to its demise. Worse still, if a business owner ignores those constraints, continuing to trade without implementing strategies to reduce their debt and exposure, then they risk engaging in “insolvent trading”, which puts personal assets on the line to satisfy creditors, chief amongst them the ATO.

Implementing efficient business systems to better manage these debts through early identification and prompt collection of overdue accounts can lead to improved cash flow and stronger financial positions.