A new broom at the Bank of England

In the next few weeks the Bank of England will have a new Governor when Sir Mervyn King retires. His successor, Canadian Mark Carney, inherits the role on July 1. His job will not be easy, despite GDP showing a 0.3 percent increase for Q1 of 2013. 

The Governor has to juggle many balls including trying to control inflation and unemployment whilst addressing weak growth at home and at the same time, keeping an eye on the international value of sterling. Since the start of the financial crisis inflation has mostly been above the two percent target.

What is fairly certain is that stimulating growth will be high on his agenda. Whilst the economic problems we face seem never-ending, the UK economy will recover. It’s not “if” but “when.”

Trading out of a recession is not for the faint-hearted. Statistically, many businesses fail as the economy recovers, often because having depleted their reserves when times were tough and then they have insufficient working capital to fund growth and expansion. And just when cash flow is tight, a major risk faced by businesses is that of bad debts.

If you are running a business and you allow credit to your customers you will be aware of the risk of suffering a bad debt and that risk will never go away – it’s part of being in business. In some cases it can be an irritating inconvenience – lots of effort only to end up losing money.

But if the amount is large enough it can cause your business to fail. There is no way of guaranteeing you won’t be hit by a bad debt but you can take steps to minimise the likelihood if you:

• Check out new customers by taking trade references and undertake a credit check
• Allocate a credit limit based on your findings and stick to it
• If they don’t meet your standards issue pro forma invoices
• Review existing customers regularly and be alert to warning signs – e.g. gradual slowing of payments, offers of payment on account, etc
• Invoice promptly - if you are too busy outsource the work
• Have a system for chasing payments and stick to it; it should get progressively tougher until you are paid or hand it to a solicitor or debt collector.

Bad debts deliver a double whammy. It’s not just the immediate impact on cash flow and profitability but the loss of an on-going customer and consequential reduction in turnover. So if you do suffer a bad debt which you think is threatening the very existence of your business, take professional advice promptly to establish if the business can ride out the storm and help to formulate a survival strategy.