Starting your own business, part 10: Dealing with your first bad debt

So you have experienced your first bad debt. Late payment is a regular occurrence, whereas with a little care bad debts risk can be reduced to manageable proportions, even in the construction industry.

Securing a credit rating is an easy matter. A quick google will produce a list of firms who provide the service on fairly modest terms. There are no guarantees however, even where a good credit rating has arrived.

Keeping a tight rein on the debt situation by negotiating short payment periods, prompt billing and chasing outstanding money before it becomes a problem, reduces the risk to a large extent.

The loss of £12,000 in your first year due to a bad debt, means you miss your first year's profit target and leaves a hole which needs to be filled.

Your part-time accountant is due to produce the goods in respect of your first year's trading. The better half has suffered from you mood swings all year and will no doubt be looking for a good result and a long weekend possibly in the sun.

In discussions with your accountant, concerning the year end accounts, you realise what is meant by creative accountancy. One plus one will always make two. However when your accountant asked you the position regarding the value of work in progress, he might as well have been speaking in Swahili for all it meant to you.

You naively thought the profit was calculated by a simple method of totting up the total fees you have billed to the clients and then deducting the costs and expenses; no such luck.

Negotiating short payment periods, prompt billing and chasing outstanding money before it becomes a problem, reduces the risk to a large extent

To the total sums billed has to be added the value of work both completed and part completed, which hasn’t yet been billed. How does one value part-completed work when operating on a lump sum commission. That’s where the creative accounting comes into its own.

Another intriguing accountancy/tax matter is to decide how much to pay yourself as salary and how much as dividend. However the amount of dividend you can pay yourself depends on the profit and cash in the bank.

Then there is the crocodile in the room to be fed, in the form of HM Revenue and Customs. Preparing the quarterly VAT returns involves losing good fee-earning time, with no reward, but at least you are aware of the financial commitments.

Corporation Tax levied on the profit however, is a decidedly different matter, which is where the creative accountancy on the work in progress comes into its own.

The first year’s results are a landmark which can never be repeated. Regrets, well you may have a few, but there is no turning back.

In the middle of the worst recession since, well nobody seems to know, your forward workload is less than three months; a £12,000 bad debt; tax man to be paid; what the hell, get on the internet and book that long weekend in the sum.

On second thoughts give her an unexpected treat and make it a week.