Bad debts- 5 Warning signs to ponder upon!

A debt owed in the name of any client does not go bad abruptly. There would have been pre-existing and persisting issues which made the account go bad. Keeping an eagle eye on the transactions entered with debtors can help you identify and foresee the account going bad. You will not need to chase the debtors for your dues or carry out the litigations if you spot the signs a little earlier. 

As prevention is better than cure, while observing these signs, you can minimize your exposure of losses. Also, you will have room to take appropriate steps towards prevention of bad debts in your business. Once the debt becomes bad, incurring extra cost on litigation is an added trouble. Here, are some early signs which can help you identify an account being on the verge of becoming bad:

As prevention is better than cure, while observing these signs, you can minimize your exposure of losses. Also, you will have room to take appropriate steps towards prevention of bad debts in your business. Once the debt becomes bad, incurring extra cost on litigation is an added trouble. Here, are some early signs which can help you identify an account being on the verge of becoming bad:

1. Downsizing: If you come across any news of downsizing of the debtor, it will probably be due to a shortfall in the resources. Closing of branches, reduction in product range, cutting off the operational area, could be the indication that the debtor is on the way out. Reducing and slashing on the operations is generally the first sign of becoming bankrupt.
2. Admitting Cash Flow problems: A short-term cash flow issue is common in most business models. At several instances, the debtor may admit that he is going through a cash crunch and hence the liability owed towards you is delayed. 

3. Changing payment terms: The payment terms as per your invoice or the purchase order issued by the debtor is expected to be followed by the debtor. Wherein a minor delay is also acceptable being the regular practice but long delays and unmet assurances are something an eyebrow raiser. Not only delaying the payment, paying in parts could also be a sign.

4. Exiting employees: The employees know better than you do. More specifically, senior management is aware of in and out of the company. They are conscious of the situation in the present and the consequences that may happen in future. Exiting the senior management of your debtors is an effective sign to understand that they are going through difficulties.

5. All time low Credit Rating: Being trapped in negative cash flows, will result in skipping the due dates for payments. This will impact their credit rating which is absolutely a red alert to take all possible necessary steps to recover your due and know that the debtor is towards a fall.

One of the above signs alone cannot be a parameter to ascertain that the debtor accounts bad debt, but occurrence of few aforesaid signs together points towards it. You will be required to fasten your collection process and also limit the credit risk with such clients. Reaching out to an expert or professional can also be a way out.