How businesses can effectively manage accounts receivable and minimize bad debts
In the course of business operations, the occurrence of accounts receivable is unavoidable. If not managed properly, overdue receivables may directly affect a company’s cash flow.
Moreover, overdue receivables may become bad debts or debts that are difficult to recover, increasing financial costs, disrupting business operations, and even leading to prolonged disputes.
The article below outlines measures that businesses can take to effectively manage their accounts receivable.
1. Why do businesses need to manage accounts receivable to minimize bad debts?
Allowing overdue receivables for an extended period may weaken cash flow, affect a business’s ability to fulfill its other financial obligations, and increase both management and debt recovery costs.
In many cases, businesses may also have to rely on borrowed capital to compensate for cash flow shortages, thereby increasing financial pressure and reducing business efficiency.
It should be noted that current laws do not specify a particular point in time at which receivables between businesses are classified as “bad debts”. The term “bad debts” is primarily used in the operations of credit institutions under specialized legislation.
However, in business practice, receivables that have become due but remain unpaid, particularly those that have been overdue for a prolonged period or where the Debtor repeatedly delays payment, avoids communication, or is no longer capable of making payment, are commonly regarded by businesses as bad debts or debts that are difficult to recover.
In such cases, debt recovery often becomes more time-consuming and costly, with an increased risk of legal disputes.
Accordingly, businesses should pay attention to managing their accounts receivable from the stage when the parties prepare to enter into a contract, throughout the contract performance period, and until the party with the payment obligation has fully discharged such obligation.
If overdue receivables are not monitored and handled promptly, they may become difficult-to-recover debts or bad debts, significantly increasing recovery costs and adversely affecting the business’s operational efficiency.
2. Managing accounts receivable before entering into a contract
From the contract negotiation and execution stage, businesses should establish clear and comprehensive payment provisions to minimize the risk of outstanding receivables.
First, the contract should clearly specify the payment timeline, payment method, and the milestones triggering payment obligations, such as upon delivery of goods, upon completion of acceptance procedures by the parties, or at other points agreed upon by the parties.
Regarding the determination of the payment timeline, businesses should also consider establishing a staged payment schedule instead of requiring payment of the entire contract value only after the delivery of goods or completion of services.
The parties may agree that the buyer shall pay part of the contract value upon contract execution or prior to delivery, with the remaining amount payable after the completion of delivery, acceptance, or satisfaction of other agreed payment conditions.
Requiring payment obligations in installments helps reduce the value of receivables arising at each stage, thereby minimizing risks compared to requiring payment of the entire contract value in a single installment after completion of the transaction.
At the same time, if payment is delayed, businesses can reduce the risk of large-value receivables arising, thereby improving the likelihood of successful debt recovery.
For example, the parties may agree that the buyer shall pay 30% of the contract value immediately after execution of the contract, 40% upon completion of delivery, and the remaining 30% after acceptance; or adopt other payment ratios appropriate to the value and nature of the transaction.
Furthermore, businesses should clearly agree in the contract on the remedies applicable in the event that either party delays the performance of its payment obligations.
Under Articles 300 to 309 of the Commercial Law 2005, the non-breaching party may require the breaching party to pay contractual penalties where such penalties have been agreed upon in the contract, pay default interest on overdue payments, compensate for damages arising from the breach, and, in certain circumstances, suspend the performance of the contract in accordance with applicable law or the parties’ agreement.
Establishing a clear payment mechanism and contractual remedies from the contract execution stage is also one of the key measures to help businesses minimize the occurrence of bad debts during contract performance.
3. Managing accounts receivable during contract performance
One of the key principles that businesses should bear in mind is that receivables should not be allowed to remain outstanding for an extended period.
Based on practical experience, the first three (03) months from the date the debt arises are generally considered the period during which recovery is most likely, as the Debtor is usually still operating its business and is capable of arranging sufficient funds for payment.
The longer the debt remains outstanding, the lower the likelihood of recovery, as the Debtor’s assets, cash flow, or financial condition may change over time.
Closely monitoring payment deadlines and taking prompt action immediately after a debt becomes overdue is therefore of particular importance.
In practice, the longer receivables remain outstanding, the greater the risk that they will become bad debts.
At that stage, the Debtor may encounter financial difficulties, cease operations, dissolve, or dispose of its assets, thereby significantly reducing the Creditor’s ability to recover the debt.
Once an overdue receivable arises, the business should first review all documents evidencing the payment obligation, including the contract, contract appendices, acceptance minutes, delivery and acceptance records, invoices, payment documents, and correspondence exchanged via email or in writing.
These documents are essential for accurately determining the value of the outstanding debt as well as the Debtor’s payment obligations.
After reviewing the documentation, the business should also verify the completeness and consistency of all documents relating to the performance of the contract.
Where there is no debt reconciliation record or confirmation of the outstanding balance between the parties, the business should proactively request the Debtor to conduct a debt reconciliation and sign a confirmation of the outstanding debt.
At the same time, the business should ensure that documents evidencing the delivery of goods, provision of services, or completion of acceptance procedures, such as delivery records, acceptance minutes, warehouse release notes, invoices, transportation documents, or other documents of equivalent evidentiary value, are fully retained.
Completing the documentary records at this stage will help the business accurately determine the outstanding debt, minimize disputes regarding whether contractual obligations have been fulfilled, and establish a solid evidentiary basis should debt recovery measures or legal proceedings become necessary.
Next, the business should proactively communicate with the Debtor to confirm the outstanding amount payable, identify the reasons for the delayed payment, and agree on an appropriate solution.
Such negotiations may be conducted via email, written correspondence, or face-to-face meetings in order to document the discussions, confirm the outstanding debt, or agree on a revised payment schedule.
Taking the initiative to engage with the Debtor as soon as the debt becomes overdue not only increases the likelihood of successful recovery but also reduces the risk that the debt will continue to remain outstanding and eventually become a bad debt, particularly where the Debtor is beginning to experience financial difficulties or shows signs of insolvency.
If negotiations fail to produce a satisfactory outcome, the business should promptly seek legal advice so that a lawyer can review the documentation, assess the legal basis of the claim, and develop an appropriate debt recovery strategy.
Involving a lawyer at an early stage not only helps the business formulate an effective recovery strategy but also facilitates the preparation of sufficient evidence before initiating legal proceedings or applying other legal measures to protect its lawful rights and interests.
4. Common mistakes that make it difficult for businesses to recover receivables
First, many businesses fail to pay sufficient attention to the payment capacity of customers or business partners before entering into a contract.
Failing to assess the credibility or financial capability of a counterparty may expose a business to a significant amount of difficult-to-recover receivables.
Second, many businesses fail to draft contracts with clear payment provisions or do not specifically provide for default interest, contractual penalties, or other remedies applicable when the other party breaches its obligations.
As a result, businesses often encounter considerable difficulties when requiring the counterparty to perform its obligations or when resolving disputes.
Third, failing to retain complete transaction records, failing to regularly reconcile outstanding receivables, or delaying the implementation of debt recovery measures may significantly reduce the likelihood of recovering the debt.
In many cases, businesses only seek legal assistance after the debt has remained outstanding for many years, making it more difficult to collect evidence and reducing the chances of successful recovery.
Delaying the implementation of measures to address overdue receivables is also one of the most common reasons why such receivables gradually become bad debts or debts that are difficult to recover.
In such circumstances, businesses not only face higher debt recovery costs but also risk being unable to recover the full amount of the debt if the Debtor becomes insolvent.
5. Frequently Asked Questions (FAQ)
5.1. What documents should a business prepare for effective debt recovery?
A business should prepare all documents evidencing the formation and performance of the contract, as well as the Debtor’s payment obligations.
Typically, these documents include the contract, contract appendices, delivery or acceptance records, invoices, payment documents, debt reconciliation records or debt confirmations, and communications exchanged between the parties (such as emails, written correspondence, text messages, etc.).
Depending on the specific case, the business should consult a lawyer to ensure that the documentation is complete, assess the evidentiary value of each document, and determine the most appropriate debt recovery strategy.
5.2. When is an outstanding receivable considered a bad debt?
Current laws do not prescribe a specific period after which receivables between businesses are considered bad debts.
However, receivables that have remained overdue for an extended period, where the Debtor lacks either the willingness or the ability to make payment, are generally regarded as debts showing signs of being difficult to recover and should be addressed promptly.
5.3. When should a business seek legal assistance for debt recovery?
A business should consult a lawyer as soon as a debt becomes overdue and negotiations fail to produce a satisfactory outcome, or when the matter shows signs of developing into a dispute.
Early legal assistance enables the business to assess its documentation, develop an appropriate recovery strategy, and minimize potential legal risks.
5.4. Can legal proceedings be initiated if only emails or bank transfer confirmations are available?
Emails, bank transfer records, invoices, delivery records, text messages, and other electronic documents may all be admitted as evidence, provided that they satisfy the applicable legal requirements.
However, whether legal proceedings can be commenced depends on a comprehensive assessment of the entire case file.
Therefore, businesses should consult a lawyer at an early stage to evaluate the available documentation and prepare an appropriate strategy, thereby saving time, effort, and costs.
5.5. What is the statute of limitations for initiating legal proceedings in disputes relating to outstanding receivables?
For disputes arising from commercial contracts, Article 319 of the Commercial Law 2005 provides that the statute of limitations for initiating legal proceedings is two (02) years from the date on which the lawful rights and interests of the claimant are infringed, unless otherwise provided by law.
Accordingly, businesses should not allow outstanding receivables to remain unpaid for an extended period before taking the necessary legal measures.
Managing accounts receivable is an ongoing process from contract negotiation through to the fulfillment of payment obligations.
Establishing clear payment terms, proactively monitoring receivables, and taking timely action on overdue payments can help businesses minimize risks, protect cash flow, and improve debt recovery.
If your business has long-outstanding receivables or is involved in a dispute, TNTP’s lawyers are willing to assist with reviewing your case and developing an appropriate legal strategy.
Sincerely,
