Customers do not pay their invoices on time? Learn the 5 tasks of managing overdue receivables

The article by PKF experts (Grażyna Sadowska-Malczewska - Managing Partner of PKF BPO and Dariusz Orczykowski - Tax Advisory Department Director in PKF Tax&Legal).

There is no doubt that for every entrepreneur, apart from profit, funds for the day-to-day operation of the company are important. We should remember that it is the loss of liquidity of the company that leads to its bankruptcy.

The current economic situation is not optimistic and is a cause for concern for many companies. Galloping inflation, a decline in demand in many industries and the prospect of stagflation mean that keeping the payment situation of many companies under control is at risk. The self-winding spiral of non-payment from customers, insolvent due to not receiving their own receivables from their customers, causes a dangerous snowball mechanism.

It is worth pointing out that in 2021 over 7% of companies from the SME sector were close to bankruptcy. According to the research carried out at the request of the BIG InfoMonitor Debtors Register, almost every fifth business, mainly micro and small companies, is concerned about the black scenario this year.

According to the regulations, as a rule, tax income arises regardless of whether the debtor pays the debt. If the debtor fails to pay the debt, the company is in a disadvantageous situation, because despite the lack of cash, it is obliged to pay the tax.

The legislator provided mechanisms to reduce the unpleasant consequences. Unfortunately, they do not work automatically and their use requires appropriate action.

Remember! Current regulations mean that you should actively manage your overdue receivables so as not to worsen your payment situation resulting from the debtor's failure to pay.

Let us therefore remind you of what you absolutely must bear in mind and what, among other solutions, your company can use:

• The limitation period in commercial cases is usually 3 years. It can be interrupted with appropriate tools. Statute of limitations means that the debtor may refuse to fulfill the due payment.
• Bad debt relief in income tax and VAT, recognition of receivables written off as uncollectible, revaluation write-offs, the irrecoverability of which has been made probable - recognizing them as tax deductible costs is possible provided that they are properly documented.
• Debt cancellation when there is absolutely no chance of recovering the debt. This allows for the recognition of previously accrued tax revenues in the tax costs.
• Enforcement - in order to recover a debt by means of a bailiff, the so-called enforceable title is required, e.g. a judgment or a payment order with a court enforcement clause.
• Collaterals - collateral allows you to obtain a "better" right to receivables. This means faster, cheaper or easier recovery of receivables or the possibility of first priority payment over other creditors. The most popular methods of securing are: recognition of a debt, surety, promissory note, voluntary submission to enforcement, pledge, factoring, transfer of title to security and mortgage.

Active management of receivables from the tax perspective is important because receivables written off as time-barred are not considered tax deductible costs. If the taxpayer does not act on time, he will be a double loss - he will not receive his receivables, and at the same time he will be forced to exclude them from tax costs and pay taxes.

The current economic situation should encourage managers to monitor receivables on an ongoing basis by implementing appropriate procedures and actively using tools included in the regulations and those operating on the market, in order to minimize the negative effects of non-payment from contractors.

It is in the interest of the owners and managers to ensure the safety of the company so as not only to generate profit, but also to maintain financial liquidity, necessary for investment and development activities.

If you need support in debt management, implementation of company procedures and legal and tax advice, we invite you to cooperate with our experts.