Arrears: Real Business Demon

When I asked my accounts manager to give me a summary of outstanding liabilities, with the hope of clearing them on one transaction, I was overwhelmed. As far as I knew, outstanding payments were just about K50,000 or less and thought it was not a big deal. We have dealt with small debts in the past two years of operation and have never fallen behind in payments (meaning we paid everything within 30 days of invoice).

What I experienced on this occasion was stomach arching. The figures were generally in smaller amounts (K4,000; K7500; K1,500) but the cumulated figures were three times larger than I thought. Most of them were for suppliers who had offered us services (design and printing; audit fees; rent; supply of stationary and computers; advertising; branding services; tax consultants; accounting software designers).

A number of businesses are experiencing the demon of arrears in their day to day operations. Arrears torment businesses to the extent of liquidation and most of those that started off well are now struggling to survive. The business itself could be making money but the arrears have capacity to swallow up not only the future strings of receivables but your creditworthiness. Creditworthiness in a country where liquidity is becoming tight by the day is your licence to operate.

It is therefore, important that your business should never allow itself to fall behind in payments. Salary arrears and those of statutory bodies can be the most menacing. Some of them have an interest component. When you fall behind in salaries three months in a row, you are in maningi trouble. The longer it takes to redeem salary arrears, the harder it becomes to do so. First, the staff moral itself collapses as employees sneak off working time to earn survival incomes elsewhere. Second, your preoccupation as a business is now about net salaries, hoping statutory remittances can be sorted out later. This is the beginning of serious trouble! Here are my suggestions about ensuring the arrears demon is cast out as soon as possible.

INTERCEDE: As boss and owner of the business, you have no choice but to be personally involved as the boss of the company. Financial managers are good at keeping stock of what is outstanding but will not do much in helping you stop the problem from escalating. What I have discovered is that companies are very good at following the budget in terms of expenditure but very weak at marching expenses with revenue, particularly where it is not a cash budget.

In other words, we can be consuming products and services without realizing the income column is blank month after month. By the time we realise we have fallen behind many months, the bailiffs are at the gate. This takes the boss with a huge surprise, and it’s too late to get a clear explanation from the finance team on what is happening.

If anything, the finance team will tell you it was not them purchasing; it was the user departments working together with the purchasing unit, and the purchasing unit will tell you most of the purchases were initiated by you. It is important that, as the owner of the business, you once in a while take over the driving wheel, keeping the tab on costs, managing the flight until you come out of turbulence. You should never over-entrust your technical staff to manage the business. You are not just there to bring in business. You are there to manage it as well. By the way It is when we are awash with cash that we make unhealthy contractual commitments to purchase anything on offer. Watch and pray against that arrears demon!

It is when we are awash with cash that we make unhealthy contractual commitments to purchase anything on offer. Watch and pray against that arrears demon!

START REDEEMING: This is the time to bite the bullet, focus on redeeming the debts as quickly as possible. Your strategy should be all encompassing: deciding on new sources of revenue for your business, prioritizing all debts – probably by either aging them or by focusing on that with the interest component.

In our business, we have a policy to prioritize statutory arrears and money due to individual suppliers. We seek to pay individual suppliers first because they have no capacity to survive without cash. Most of them have no overdraft arrangements with banks to manage operations before we pay them.

It is also important to communicate to all creditors about efforts you are making to redeem the arrears. The aim is to have them cleared before they become problematic. Arrears for employees can be redeemed by focusing on junior staff. If you assess that the arrears are becoming impossible to redeem even if you sold assets, stop operating – declare bankruptcy!




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