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Bad debts and worse debts

Philip Fisher reminds readers about the cost of ignoring unpaid fees and warns about unexpected risks.

13th Feb 2020
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Man cries out to another who does not hear him because he has the ears full of banknotes
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In principle, running an accountancy practice is very simple.

You persuade somebody that they need a piece of work, you and colleagues carry out the project, you render a fee and the client pays it. There are often hiccups along the way, but 98% of the time this process runs relatively smoothly. This article, however, will focus on the other 2%.

Let’s ignore the situations where there was a technical screw-up and the work wasn’t done correctly or on a timely basis. These things happen and must eventually be overcome. A far more frustrating phenomenon occurs when clients fail to settle their fees.

In some instances, the actions or, more commonly, inactions of accountants are a partial cause of slow payment. If you don’t send out a fee note swiftly, the client may have forgotten what you did or, in a worst-case scenario, have run out of money.

Therefore, lesson one is easy. Do the work and then send out the invoice immediately. Going a step further, if it isn’t paid according to the contractual terms, typically 14 days or 30 days, then you or your credit control team should be chasing on day 15/31, as appropriate.

The problem with cashflow

Sometimes clients have cashflow challenges and request extended payment terms. Here, a judgement call is required. To start with, you need to decide whether they are in serious financial difficulties, in which case it may be best to press for payment, even if you have to agree to accept a reduced amount.

Such action must be balanced against the danger of offending a client who could be valuable in the long term for future projects and referrals. However, most of the serious problems come from those that try to take advantage of your good nature.

We constantly read about multinationals who do not pay small suppliers for months or even years, sometimes even driving them out of business. This can even happen with governmental organisations, although sometimes that results from hopeless inefficiency rather than anything more sinister.

The obvious response is to demand upfront payment or stop providing services to those who only pay for them after causing you a great deal of sleep deprivation. This is great in theory but, in practice, most of us want to continue working for prestigious organisations, even if there is the odd bump in the road along the way.

A cautionary tale

Let me finish with a cautionary tale drawn from the annals of a long defunct mid-tier practice. Long ago, that firm carried out a vast amount of work for a client which kept extending its credit terms. Rather naïvely, the lead partner kept on providing additional services without collecting large fees.

Eventually, the unpaid sums were exorbitant and, accepting that this would terminate the working relationship, the firm sued.

Seeing that it had nowhere to turn, the (former by this stage) client counter-sued claiming that some of the work was inadequate. It contended that the resulting losses were a massive multiple of the unpaid fees. Indeed, had it been successful then the accountancy practice and its partners would have respectively been insolvent and destitute since the sum claimed was way above its insurance excess.

The matter eventually ended up in court and the judge very quickly laughed the client off the premises. Unfortunately, by the time that the fees and legal costs were added up, it very quickly went into liquidation, meaning that the insurers were significantly out of pocket, as were the firm and partners.

The moral of the story? Don’t do work if you’re not going to get paid, invoice on a timely basis, and collect promptly.

 

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By meadowsaw227
14th Feb 2020 10:25

Isn't the real moral of the story only the solicitors/barristers ever win so don't bother with the courts ! .

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