In today’s business operations, one of the main causes that lead to difficulties in cash flow control and affect profitability is the emergence of debt. So what are the common causes of bad debt? In this article, TNTP’s lawyer will provide insights into the causes of bad debt to give readers a better understanding of this issue.
1. Ineffective financial control
One of the most important causes of bad debt is ineffective financial control by businesses. Ineffective control is manifested by the absence of control procedures or unclear, specific, and transparent financial control processes, resulting in the wastage of the company’s financial resources. If the ineffective financial control persists, it will lead to a lack of capital for business development, reduce competitiveness, and even cause cash flow deficits, directly affecting the company’s operations.
Furthermore, ineffective financial control has a significant impact on the emergence of debt because the company cannot control or prevent potential debts with partners. This becomes a burden for the business over time because when the company lacks control and limits on debt, the amount of debt will increase over time, accompanied by capital deficits due to ineffective financial control within the company. This situation can push the company into a state of financial inability, and even lead to the cessation of operations.
2. Insufficient profits compared to expenses
The main objective in business operations for companies is profit. However, due to various reasons, ineffective business activities can result in low profits. Specifically, here are some reasons:
a) High input costs
Businesses incur input costs to provide services or products. However, depending on different periods and suppliers, as well as market demands, input costs can vary. In cases where the input costs exceed the profits generated, it will not be enough to compensate for the invested capital. This situation can lead to the emergence of debt if the source of the input costs is borrowed money.
b) Inadequate quality of output products/services to meet market demand:
In business operations, there is always continuous and harsh competition over time. If a business cannot provide products/services that meet the quality requirements of the market, it will gradually lose customers. Additionally, misidentifying customer segments, the quantity of customers, as well as the business’s ability to meet demand, can also lead to the inability to supply suitable products/services. If a business continuously fails to meet market demand, the emergence of debt will only be a matter of time because when it cannot meet market demand, profits will decrease over time. Eventually, the business will be unable to continue operating because the profits cannot compensate for the invested capital.
3. Inability to effectively recover the debt
One of the crucial reasons leading to the emergence of debt for businesses is the inability to offset expenses incurred in business operations with profits. In addition to ineffective business operations and inefficient capital management, the inability to effectively recover debt from unpaid partners is also a leading cause of bad debt for businesses.
There are several reasons why businesses may not have the ability to effectively recover debt, specifically:
a) Ineffective debt recovery team
To achieve effective debt recovery, the employees responsible for debt collection in the business need to be equipped with the necessary knowledge and experience to handle outstanding debts. In cases where these employees lack the required expertise in efficient debt recovery, it becomes difficult to recover the debts. Moreover, if the debt recovery personnel have an insufficient understanding of legal regulations, they may engage in unlawful debt recovery activities that seriously impact the business’s interests or even constitute criminal offenses as defined by the Penal Code.
b) Prolonged existence of debts
The longer a debt exists, the more challenging it becomes to recover. In such cases, the debtors tend to avoid payment to retain the capital for as long as possible. Allowing debts to linger for an extended period also poses risks to the business. Once the debtor accumulates a significant amount of debt, they may become unable to make payments. When the debtor loses the ability to pay, the chances of debt recovery become extremely difficult, often incurring additional costs without guaranteeing the full recovery of the debt.
The above is an article on the topic ” Causes of bad debt arising” based on the working experiences of TNTP’s lawyers. We hope that this article will bring benefits to the operations of your businesses.