Reasons why businesses need debt management policy

In business activities, debt is an inevitable factor and has a direct impact on cash flow, profits and the ability to maintain operations of the business. Cash flow is likened to the blood vessels of the business, slow debt collection or debt collection becomes a direct cause leading to financial imbalance, affecting business operations and even bankruptcy. However, reality shows that many businesses only focus on production, sales, or market expansion without a systematic debt control mechanism.

To prevent this risk, it is essential to develop and apply a “Debt Management Policy”. This is not only a financial management tool but also an internal legal framework to help businesses control, collect and handle debt effectively, in accordance with legal regulations.

Through this article, TNTP will point out 4 important reasons why every business, large or small, needs a clear and comprehensive debt management policy.

1. Classify the debt effectively

Debt classification is the first step and the foundation in building an effective debt management policy. A scientific debt management policy will help businesses have a comprehensive and accurate view of the financial situation, risk level and recovery ability of each debt. Debt classification can be done according to many criteria, depending on the specific operations of each business, including:

– By value: Classify debts according to capital sources, scale… Businesses should prioritize handling large-value debts, especially those that account for a high proportion of total debt. Focusing on large-value debt groups helps businesses allocate collection resources effectively, optimize management costs, and significantly minimize financial risks.

– By overdue payment time: Classifying by payment due date helps businesses proactively control cash flow and detect early signs of late payment.

• Debt within term or under 30 days;
• Debts overdue from 30 to 90 days;
• Debts overdue over 90 days.

Classification according to this criterion helps businesses determine when to apply reminder measures, negotiate or initiate lawsuits.

– By relationship level: Businesses can divide debt groups based on their relationships with customers, for example: traditional customers, strategic partners, new customers or high-risk customers. This identification helps businesses apply appropriate policies or handling measures, both ensuring rights and maintaining long-term cooperative relationships.

– By recovery ability: Businesses can assess debt recovery ability based on operating status, payment status (currently paying or unpaid), and cooperation during the working process of partners. Classifying debts according to their ability to recover (easy to recover, difficult to recover, or at risk of losing capital) helps businesses quickly identify risks and plan effective and appropriate handling.

Building and classifying debts helps businesses improve the efficiency of monitoring and managing their capital sources, forecasting the ability to recover, determining appropriate measures for each debt group, and minimizing the risk of losing capital.

2. Build an effective and unified debt collection process

Debt management is not only classifying and recording debts, but also includes monitoring, reminding and collecting debt. Debt collection is a systematic activity, requiring coordination between departments in the enterprise and needs to be carried out according to a unified, clear and legally compliant process.

If the enterprise does not have a standardized process, debt collection is often handled on a case-by-case basis without a general plan. This leads to a waste of time, resources, and easily causes desynchronization between departments (normally the business, accounting and legal departments). In addition, the lack of a clear process will cause business to handle several issues at the same time, making it difficult to control the debt collection process, thereby increasing the risk of losing receivables and affecting the effectiveness of corporate governance.

Typical stages of a debt collection process:

Stage 1: Negotiation, bargaining to collect debt

Enterprises will proactively contact the debtor to remind, confirm payment obligations and agree on a debt repayment plan. The parties can agree on a payment schedule, security measures or extend the payment obligation within a reasonable time. Skillful negotiation helps maintain cooperative relationships and reduce the risk of disputes.

Stage 2: File a lawsuit at a competent dispute resolution agency

If the debtor does not cooperate, the enterprise can file a lawsuit at the Arbitration or Court. A complete petition dossier may include contracts, delivery documents, payment and exchange between the two parties. The support of the legal team or lawyers helps the enterprise to protect its rights to the maximum.

Stage 3: Enforcement

When there is an effective judgment, decision or arbitral award, the enterprise will promptly request the enforcement agency to organize the recovery of assets or money. Close monitoring helps ensure effective enforcment and avoid losing benefits.

A well-developed and implemented debt collection process helps business become more proactive in minimizing financial risks and improving the efficiency of management and business operations in a stable and sustainable manner. Implementing a debt collection process also helps business shorten the time to collect debts, ensure compliance with the law, and strengthen coordination between departments as well as maintain unity between them. In addition, this process also helps business accumulate practical experience, gradually forming a professional and sustainable debt processing system, creating a foundation for effective and stable financial management in the long term.

3. Clearly define the roles and responsibilities of departments

Debt collection is not only the responsibility of the accounting or legal department but is a process that requires synchronous coordination between many departments. Clearly defining roles and responsibilities helps to avoid overlapping and missing tasks, while ensuring debt settlement progress is quick and effective.

A good debt management policy needs to clearly define the roles and responsibilities of each department, for example:

• Sales Department: The focal point for customer contact, responsible for monitoring the cooperation situation, early identification of signs such as late payment or changes in financial capacity. This department provides information, transaction records and supports debt classification, assessment of recovery ability.
• Accounting Department: Monitor, compare and accurately verifiy debt data; promptly warns of due or risky amounts. They are also responsible for providing documents, invoices, and reconciliation records to serve the collection work.
• Debt handling/Legal department: Directly implement collection measures, including debt reminders, negotiations, making payment request notices, and preparing lawsuit documents when necessary. At the same time, advise the Board of Directors on appropriate legal solutions to protect the interests of the business.
• Board of Directors: Approve and issue official documents, orient collection strategies, decide on handling measures for each debt group. At the same time, monitor progress, evaluate effectiveness, and adjust debt management policies when necessary.

A clearly defined debt management policy helps to increase coordination between departments, avoid confusion or shrinking of responsibility, and at the same time increase initiative and efficiency in debt collection. A well-built debt management policy will help the process operate effectively throughout the organization.

4. Establish a legal and internally consistent collection process

An effective debt management policy not only focuses on debt collection but also ensures that this process is carried out in accordance with the law, transparently and consistently throughout the enterprise. Establishing legal and internally consistent collection principles is a fundamental factor that helps enterprises maintain sustainable collection activities and limit legal risks.

First, compliance with the law is a mandatory requirement in all debt collection activities. Enterprises must absolutely avoid violations such as threats, coercion or publicizing personal information of debtors, because these actions can lead to administrative sanctions or even criminal prosecution. Compliance with the law not only helps enterprises protect their legitimate rights and interests but also demonstrates professionalism, reputation and respect for partners.

Second, ensure consistency with internal regulations. Debt collection policies need to be closely integrated with the current regulatory system of the enterprise, including:

• Financial management policies to ensure that the collection process is closely linked to cash flow control and budget planning;
• Risk control systems to early identify debts with potential risks of capital loss;
• Regulations on employee responsibilities in monitoring, reporting and handling debts according to procedures.

Ensuring legality and internal consistency helps enterprises minimize legal risks, ensure debt collection activities are carried out safely, legally and sustainably; at the same time, maintain discipline, increase coordination efficiency between departments, avoid overlapping responsibilities, thereby achieving the set goals.

Compliance with the law and internal consistency are not only necessary conditions for debt collection activities to take place safely and effectively, but also the foundation for helping enterprises maintain reputation, professionalism and sustainable development in the market.

A debt management policy is a legal shield and financial protection mechanism for the enterprise. Thanks to this policy, the enterprise can be proactive in collection, transparent in handling, and consistent in internal coordination.

Above is the article “Why Enterprises Need a Debt Management Policy”. Hopefully this article will give readers an overview and useful for the management and operation process of the enterprise

Sincerely,