Covid pandemic has exacerbated the problem of bad debt: Deborah Lockwood

It really is a question of businesses assessing if they are actually solvent.

It’s about stepping back, taking a look at their ledgers and actually working out whether or not unpaid debts are going to come in, are those customers going to pay.

Leaving the invoices on the balance sheet when you know there is no way they are going to pay may make it look like the figures are good but bad debtors are of no great use to a business which may be struggling with cash flow.

While some directors may look at selling or assigning these debts, this can often result in additional costs and increase the likelihood of the company losing proper control of their ledgers, immediately creating a bigger problem than they had originally.

The issue of bad debt is one that all companies face and one that has been exacerbated by the pandemic and the implications of government support, bounce back loans and HMRC repayment plans, all of which are now being called for payment.

Now, more than ever, is the time to looking at the underlying cause of any struggling company’s debt portion and ask very seriously if an invoice is going to be recoverable.

Never forget that even as people talk about living in a cashless society, in the business world cash is king and without properly managed cash flow there is no successful business.

For any company thinking that further borrowing is the answer, rather than calling in those outstanding debts, then they have to be aware that borrowing to fuel cash flow is not the answer but that bringing in those debts can assist things enormously.

Keeping on top of bad debt should always be a good habit to get into, a good discipline which demonstrates that you are aware of how healthy your finances really are.

During the pandemic, some businesses took on levels of borrowing that they would previously have never considered taking on, nor would they have been approved or been able to obtain such large amounts of borrowing.

That, coupled with arrangements with creditors including HMRC, is bringing companies to the point where they are gathering levels of debt where even repayment plans are becoming unmanageable.”

It is businesses which, prior to the pandemic, were reluctant to take on high levels of borrowing, which are now being left particularly vulnerable.

They saw borrowing for the first time perhaps as a way out of a cashflow crisis but taking out loans for additional funding can be a very problematic approach and certainly a short term one which has no view of the future and no thought for underlying issues such as reduced customer demand, increased costs and other uncertainty.

Directors should not be committing to additional borrowing without having a full understanding of the company’s current financial position and a realistic cash flow projection in order to justify their actions.

Above everything else, they need to be mindful of their current levels of debt and not simply act without due care and attention and without thinking of the consequences of their decisions.

Deborah Lockwood is a partner in Sheffield insolvency and business turnaround specialists Graywoods