Keeping a small business going isn’t for the faint of heart. While 80% of companies with fewer than 500 employees make it through Year 1, just 70% are still operating at the end of the second year. By the time they hit the five-year mark, just half of the small companies are still in business. Of those small-business owners who shut their doors, nearly half point to a lack of funds. Put simply, not enough money was coming in for them to pay employees or cover other expenses.
In this article, we will enlighten you all about the problems that occur due to High Outstanding and its solution.
Offering credit terms to customers is now widely accepted as the norm. In some industries, it is therefore pretty much an expectation. But, for many businesses, it can be problematic.
High outstanding and its problems:
In many businesses, selling on credit is a common practice. The customer expects as if it’s a normal purchase process and the seller also has accepted as it’s a part of selling.
But in such cases, it is mostly observed that money comes from customers when they are having a good season or their business is running properly. Due to such operations bad debt increases. It is because either you don’t memorize the customer list or you don’t remember the actual date or the actual amount of the customer so that you can plan and give reminders to them and can continue the cash flow.
Taxation also plays a vital role in this. Companies don’t give you credit sites for more days because of GST like taxation and their audit.
So you are receiving less credit and if you are giving more credit to your customers then you will definitely have this problem. Increasing debt is also a very big issue created because of this.
Let’s see the whole process of the dealer’s operation. Dealers operate on the money from the bank in the form of loans etc. Then they use it to purchase their inventory. He holds the stock for many days but pays interest on it. To overcome this situation and recover this loss, he sells items on credit at higher prices. Credit facility does attract customers but higher price drives them away.
Such activities lead to adverse effects on business. The main effect of this is cash flow stops. So the businessman will always be short of cash. Their balance sheet will be showing profit and big turnovers but in the actual scenario, he will be always worried for his business.
Gross profit and net profit will be good on the balance sheet but practically there will be a cash crunch. So to overcome this, more loan amount is the only solution that businessmen have. So increase in loans and bad debts can lead to closing down your business.
Solution?
This is the situation of two out of three businessmen. But what you should do? Here is the answer to tackle outstanding or credit problems.
Things to change in business:
- Get higher credit from the supplier’s side
- Give Less credit on the customer’s side, or prefer to use the cash method.
- Take a small margin to attract more customers.
If you could get better reports of your business from software then it would be great. Things to check :
Outstanding reports:
- Amount wise
- Area wise
- Day wise (Time period)
How can you stop increasing the credit problem:
while any sell just checks for:
- Credibility of customer
- Profit on items
- Create the type of customer and set the price as per the customer based on his records.