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Greetings!
At some point in the life cycle of your business, you may run into a customer that has financial problems and cannot pay. Below is a series of articles on being proactive to minimize risks if your customer files for bankruptcy.
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When your customer shows signs of trouble...
The
importance of having a strong and open relationship with your accounts in tough
economic times is critical and it is important to pay attention to the warning
signs in your business before they hit you where it hurts.
Mary Repke, owner and "Chief Bag Lady" at Coakley Business Class, knows this first-hand.
As a manufacturer of upscale professional women's bags, Coakley relies
on a series of distributors to get products to stores. When some of her
distributors were experiencing financial hardships, Mary was quick to act. By
doing so she minimized her exposure to customers closing their doors and
jeopardizing her company's future as well.
Mary has
these suggestions to minimize risk with customers:
Pick
up the phone and make the call: As you recognize that
your orders are slowing down you need to contact your customers and find out
what is going on with them so you can get a more clear picture of what the
potential impact on you will be.
Try
to collect on all open invoices according to terms. If your customer moves toward slow
pay because they can't make a full payment, help them out by offering to take
payment on a credit card or a monthly payment plan for three months (this may
give them extended terms or cost you a few points, but you have a better chance
of getting paid in full than not at all).
Make
sure your paperwork's on top. Take the time to resend a billing statement with back copies
of all open invoices every month. You want your paperwork on top of their
papers, not buried at the bottom. >>>Read more>>
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An ounce of prevention-- and your legal options
We asked
business attorney Alice Turinas from the Law Office of Robert Mark LLC for legal tips to help prevent loss from financially distressed
customers. Here's what she had to say:
"Proactive contract
terms: Be sure that your contract form includes provisions to protect
you. You might want to have it reviewed
by an attorney experienced in commercial matters. S/he may suggest some
additional provisions, for example, to cover precise payment terms, rights in
collateral and enhanced rights to reclaim goods.
Collect
early and often: Getting payment in advance, invoicing frequently for
installment payments and requiring cash on delivery can lower your exposure. Other
potential protections include getting a letter of credit from a bank or a
written personal guaranty from the owner of the business.
Avoid the boomerang
effect: Unfortunately, even the
practices described above may not protect you completely. Plus, you may face more than the risk of not
getting paid going forward. It may sound
crazy, but in some instances a bankruptcy court can require you to give back what your customer has paid
you, even if you've already delivered the product or service, and even if your
customer still owes you money. Whether
you are legally required to repay, and if so how much, depends upon the
circumstances, and is very fact-specific.
Get legal
advice promptly: If doubt arises
about a customer's ability to pay, an experienced lawyer can help you minimize
exposure, but delay in following legal advice can cost you. For example, while you may be entitled to
reclaim goods still held by the customer, you must act before the applicable
deadline. Keep good records and seek
legal advice promptly if you learn that one of your customers is having
financial difficulties or has filed for bankruptcy."
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When all else fails, there might be a tax benefit
So
if, despite your best efforts, you still have uncollectable invoices, can you
get a break on your taxes? We asked
Marcia Geltman, CPA and partner of Nisivoccia & Company LLP what to
do. Here's her reply:
"In
today's economy it is a struggle enough for many vendors to simply stay
afloat. The collection time on
receivables has slowed down and working with a customer in order to structure
receivable payments is becoming more and more common. But with all the best intentions by both
parties, sometimes the customer's business fails and the vendor is left with an
uncollectible receivable.
The
tax treatment depends on how the income is reported. A cash basis vendor reports income only when
received. Therefore, a cash basis vendor
does not include the receivable in income and thus is not allowed to claim the
uncollected receivable as a deduction.
An
accrual basis vendor, on the other hand, reports income when earned. If the income is subsequently determined to
be uncollectible, the accrual basis vendor would be able to claim as an expense
the uncollected amount.
If
an attorney or other professional is hired to assist with the collection, the
cost of those services is deductible."
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Did you miss a newsletter? Visit our Archives
Are you a new subscriber and would like to see past newsletters? Or might you be looking for more tips on managing your business' finances? Visit our Archives for in-depth analysis of today's hot financial management topics.
Finding funds in the credit crunch
Customer profitability
Reducing healthcare costs
Finding cash in your business
The Employee Free Choice Act
Creating a plan
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Save money and get your books
cleaned up.
At half the cost of most accounting firms, we can take your Quickbooks files (or shoebox of receipts) and get them in organized, entered and reconciled for the end of the year.
Then get back on track.
As part of our services, we'll do a high-level review of your books and give you suggestions on ways to improve profitability and manage cash flow. We'll also provide a comparison of your business against industry averages so you can see where you stand vs. the competition.
Contact us for a free consultation. |
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Our Services
Monthly financial reviews
Cash flow forecasting
Pricing for profitability
Customer & product line profitability
Cost analysis and reduction
Financial coaching
Financial modeling
Accounting/Bookkeeping
More>>>
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About Profit Point Consulting
Profit
Point Consulting works with small- and medium-sized businesses whose needs
extend beyond basic accounting and tax planning - businesses that want to
increase profits, manage their cash flow, and get better control over their financials. We provide financial management services giving you a better handle on your numbers, so you
can make better pricing and capital investment decisions - and we do it in an
approachable, easy-to-understand way.
To find
out how our experience and insight - along with our forward-looking,
fresh-thinking approach - can help you, please contact us for a no-fee
consultation.
179-9 Route 46 West No.187
Rockaway, New Jersey 07866
973.659.1430
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