Possible cash flow problems in your business

Often the cause of cash flow problems in a business lies in the non-payments or slow payments of debtors. The owner of a business needs to know what the average days are that your debtors take to pay their account. For example, if the formula calculates that debtors take 62 days to pay, then you need to make provision in your funds/savings to carry all the business expenses, as well as VAT and other tax for 62 days.

The following methods can be used to manage effective debt control in a business.

  • Segregation of duties – the person, who enjoys giving good service to clients, is not generally the best person to use for debt collecting. Choose perhaps another employee who can effectively follow up payments received and assist in debt collecting.
  • Setup a debt collecting policy – there must be no doubt when to follow up and hand over debtors’ accounts. This policy must state when and how often debtors are going to receive invoices and statements from you. It must also state how many sms’s or calls you are going to make to follow up debtors before you hand the account over to the attorney for summons and debt collecting.
  • Supporting evidence is very important – the sms’s, emails and especially final demands for handing over must be kept by you as evidence in case the debtor opposes.
  • Choose carefully the attorney handling debt collecting – the right person must regularly provide you with a report or summary of the debt collecting. Determine whether you have to pay legal fees up front, or if it will be deducted from monies received by the attorney.
  • The older the bad debt is, the more difficult it will be to collect the debt. Therefore, hand over an outstanding account at 90 days.

If the debt is impossible to collect; then Section 11 (i) will allow a deduction for these debts. There are certain requirements that must be met and you must provide evidence which shows steps followed to recover the debt. The deduction must be made in the year that the debt was irrecoverable and cannot for example be carried over to the next year. When a debtor is insolvent, then the deduction must be claimed in the same year as the insolvency. Further, the debt must belong to the business owner and should have been included in his taxable income of the
current or previous tax year. If you perhaps purchase a business along with its debtors, and the debt becomes irrecoverable, then you as the new owner will not be able to claim the deduction, because the loss is of capital nature. The method that the contract of purchase was setup can overcome this problem. Talk to your tax adviser in this regard. Also note that irrecoverable money that was lent to employees cannot be deducted because the lending of money to employees is not in the production of income for the business, but capital of nature.
Contributed by: Sonja Steenkamp, Professional Accountant SA, Professional Tax Practitioner SA This article is for general information only and must not be used as professional advice. We accept no responsibility for any mistakes, loss or damage as a result of the use of the information herein. Contact our offices for a consultation for if you require specialised advice.