4 in 5 companies cite uncollected receivables as No 1 threat to cash flow

Uncollected receivables represent the greatest threat to private companies, creating cash shortages in 80% of the companies, according to a survey conducted by R&M Audit, the sixth largest accounting firm in Romania.

“From a legal perspective, a number of factors may drive the debtor default on its debt: year to date, the most common situation was when the debtor faced major financial hardships that severely affected its entire inventory (40%), or the company has filed for bankruptcy (28% of the cases). Dissolution of a company accounts for 12% of the factors that lead to failed payments”, said Mirela Serban, Managing Partner R&M Audit.

The cash shortage was one of the effects of the global financial crisis that set in last year, and that through its spiral effect has brought small-business lending to a grinding halt, leaving companies without the cash necessary to cover its outflow obligations. “Throughout the year, the problem became more acute, but financial distress that some companies were facing spread to their business partners affecting their outstanding accounts”, said Mirela Serban.

Companies have different means to reduce the loss caused by past-due accounts: to use the services of a collection agency in exchange of a fee or the sale of the debt. Both options are destined to increase cash flow and carry fiscal benefits: both the collection fee and profit obtained from the sale of the account are tax deductible.

“Unfulfilled contracts do have consequences on the respective business, and it may get even worse in case of unpaid invoices which are subject to VAT and dividend liabilities after the end of the fiscal year. The introduction of a tax deferral option – under certain conditions – where the company can delay paying taxes could save at least 30% of the companies from going out of business”, representative of R&M Audit added.

Apart from the fiscal benefits, these measures are usually successful. The payment for this type of services is usually in the form of a percentage of the total amount owed. “However, there are still few companies using the above-mentioned means. The majority of them prefer one-on-one negotiation with debtors which may last a long time and bring new prejudice to the business”, said Mirela Serban.

“Cash is King” is well-known concept that refers to the importance of cash flow in the fiscal health of a business. “In the financial statement, a company can record profit, but with a large amount on accounts receivable unable to collect to cover payrolls, suppliers etc, it is considered to be in technical bankruptcy”, Mirela Serban, managing partner at R&M Audit said.

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