Good planning can deal with bad debts
Belfast Briefing:How many businesses in the North would be just one step away from folding if they were to suffer a sudden and significant bad debt blow?
If the latest research, carried out among nearly 500 companies is anything to go by, then a significant percentage of local businesses are vulnerable.
Almost two in every five businesses have no safeguards in place to protect them from bad debt, according to the latest quarterly economic survey by the Northern Ireland Chamber of Commerce.
Carried out in partnership with accountancy group BDO, it also reveals that the threat of bad debts is a “worsening problem”.
Of the 500 businesses who took part, 31 per cent reported that the level of bad debt had risen over the last 12 months.
It is an alarming trend for businesses already struggling to stay afloat in the credit-crunched local economy.
Chamber chief executive Ann McGregor said one-third of the businesses to whom they spoke believe bad debts could pose an increased risk in 2013.
McGregor said another big problem is getting paid on time. About 55 per cent of respondents said late payments not only threatened growth but their very survival.
McGregor believes the chamber’s survey indicates that late payment of trade invoices is a contributor to accumulating cash flow problems.
But if bad debts and late payments are two of the biggest problems confronting firms then what is the solution?
The chamber is urging businesses to be more proactive; to, in effect, wake up to the problem posed by bad debt and get “suitable measures in place”.
No company wants to try and claw back money from a customer who has not paid and cannot do so.
By the time a business looks to settle an unpaid bill it is often too late; at that stage, all they can do is hope to reclaim the VAT on taxable goods and services paid to Revenue Customs, according to one accountant.
If anything should alert local businesses to just how challenging the trading environment is, it is the never-ending stream of company failures.
The Patton Group is a good example. A 100-year-old family firm whose solid veneer masked a cash flow problem, in part caused by a customer who could not pay a bill.
It is estimated that creditors of the group, which went into administration in November, are owed some £63 million (€76 million). But it is unlikely that many of the unsecured creditors – such as suppliers and contractors – will ever see a penny of their money.
This will undoubtedly lead to other local business failure. And while Patton is ultimately to blame, the group was also a victim.
Perhaps the lesson to learn is to look closely at business relationships. It would be impossible to ring-fence every deal. Landing an order can be risky, but the unfortunate reality of doing business means firms should be more focused on the transaction.
This is why a new initiative by the Department of Finance could not be better timed.
Minister for Finance Sammy Wilson has said the Executive intends to change “significantly” the way it pays construction firms working on government contracts. The department is going to introduce project bank accounts for all such contracts valued at more than £1 million.
This is significant given that the Executive is one of the largest construction clients in the North.
Certainty of payment
Wilson believes the new payment system will give “certainty of payment timing” and will also help protect firms and their employees because the money is held in an account in trust for the supply chain.
So if the main construction contractor on a government job in the future goes bust, now at least one particular bad debt might not mean the end for everyone involved.