How to prevent outstanding receivables?

The following case happened to one of our clients. The company is a wholesale business that has been operating in the commercial sector for 5 years, with 1,500 customers nationwide. We are sharing our story and its lessons with you so that you can avoid similar situations and prevent outstanding receivables from arising in the first place.

A new customer, additional revenue

A new customer came knocking at our client's door. As in every case, the sales team carried out the company screening. They followed standard practice and checked whether the company was operational. They found a domestic building-materials distributor that was operating properly and had been registered 2 years before the case, so 1 year of financial data was available. The company screening was therefore concluded with a positive assessment.

The new customer placed their first order. Due to the "new customer" status, our client's staff requested payment in advance. The customer readily complied. The cooperation started well. A few weeks later, the customer placed another order. Our client's staff continued to require advance payment, which the customer again fulfilled without issue. The first order was worth 3 million HUF, and the second order was worth 7 million HUF.

For the third order, the customer placed a more substantial order worth 11 million HUF and asked to settle the invoice by bank transfer this time. Since the customer had not paid the first two orders in cash, and had in fact completed both transactions via advance payment, the transfer-based payment was approved. However, the money did not arrive by the invoice due date.

The negative information lurking in the background

The collection procedure began. Our client's staff received many promises, but after a while they received nothing at all, because the company's managing director became unreachable.

At our client's company, businesses were only investigated more thoroughly once a customer had at least 30 days of payment delay. So this company, too, only underwent closer scrutiny at that point — and interesting information came to light, although by then it was already too late:

• the company's owner had previously had 3 companies that were no longer operating, and several administrative proceedings were pending against those companies
• the company had previously been subject to several tax enforcement actions
• in the meantime, NAV had suspended the company's tax number

How can a situation like this be avoided?

After this incident, our client came to us for help, seeking an answer to the question of how they could have avoided the 11,000,000 HUF outstanding receivable. We recommended the following:

• Sales staff need to analyse new customers much more thoroughly, even before establishing the business relationship — a simple "is it operating?" check is not sufficient for company screening.
• The finance department should not spring into action only once there is already a problem with a partner — they too should analyse the new customer from a financial perspective. Preventing a problem is far easier than dealing with it after it has already arisen.

Exactly how much does an 11,000,000 HUF outstanding receivable cost if the debtor doesn't pay?

Lost revenue:	11,000,000 HUF
VAT:	2,970,000 HUF
Corporate tax:	1,100,000 HUF
Local business tax:	220,000 HUF
Other costs:	50,000 HUF
Total:	15,340,000 HUF