Debts are a big part of every business. Many companies rely on borrowing or lending money to sustain or grow their businesses. Some even make a living out of granting debts. But the inability to control one’s debts can be the cause of a company’s downfall, which is why paying debts is a huge and serious responsibility. For businesses with accounts receivable, collecting unpaid debt can also be a problem.
Outstanding debts are unpaid debts by a client to a particular business. These debts may also include interest. While outstanding debts are a potential source of income, they are not “good” until they are actually paid off. Even worse, outstanding debts that are not properly managed will directly affect the business’ profits.
Consequences of Outstanding Debts
Having excessive build-up of outstanding debts can ruin an entire business. For one, they are unsecured, especially for deals with no collateral. This can be troublesome if the client becomes unable or unwilling to pay off the debt. Even worse, if the client decides to abandon his commitment, the creditor can be left with nothing.
Outstanding debts also become less collectible the longer they are left unpaid. There is a 60% chance of recovery of a loan at 60 days, but at 6 months that number drops to 30%. If the creditor has a hard time collecting the debts and ends up with a pile of delinquent accounts, the entire profit is depreciated and can even lead to bankruptcy.
Unpaid debts also affect the books if they are not adjusted or updated properly. If the owner does not make the right changes after a payment or after a debt is written off, he can end up with a false statement of accounts that may be artificially inflated or deflated.
How To Handle Outstanding Debts
While having a lot of outstanding debts is risk for a business, it does not mean that one should stop borrowing or lending altogether. Debts are an important part of every business, and this included outstanding debts. The security of a business’ accounts depends entirely on how the owner manages their books. There are various methods to handling outstanding debts:
Securing Transactions
To avoid having a lot of unpaid debts, make sure to secure all transactions before going into them. This is especially important for small or starting businesses because some people will take advantage of inexperienced management. Create written contracts on loans and give copies to both parties.
Always work on equal footing. Ask for collaterals to secure the loan, charge the right interest rates, and set an appropriate time from for collection dates and grace periods. Securing transactions not only helps secure the company’s assets, it can also help build stronger business relationships with other firms.
Keeping Up-To-Date Records
It’s also crucial to keep detailed, up-to-date records of all transactions. The business’ books help to paint a clear picture of all the company’s sales and profits, so having poorly kept books gives the owner a false picture of what the business is earning or losing.
Keep track of all debts on a monthly bases and make the necessary adjustments every time a due date arrives, regardless of whether payment was made or not. If you are new at computing accounts and updating books, you can always seek the assistance of an experienced accountant. These documents will prove invaluable if you end up dealing with debt recovery lawyers.
Seeking Professional Help
When managing outstanding debts, you always have the option of seeking professional help. Debt collection agencies exist to lend a hand in collecting and managing debts, so it can be a good idea to work side-by-side with a reputable debt collections agency.
They can help you set standards for loan offers, write-offs, help with collecting debts, managing your books, and everything else involving outstanding debts.
