Understanding the Debt Cycle and Business Debt


The Debt Cycle

If you are in business it is important that you understand the Debt Cycle and how it relates to your customers / clients (your Debtors), you and the people you owe money to (your Creditors). I would go as far as to say that not understanding the “Debt Cycle” is the primary reason I am seeing an increase in the length of time it is taking for businesses to pay their creditors.

Business Debt

As a business we extend debt to our customers and our terms are that “Payment is due in 7 days of receipt of the invoice”. As the business owner, unless the client has a query regarding the invoice, I expect our clients to honour that and on the main this happens.

However having said that if I don’t follow up on an overdue account then the seven (7) days does not mean a thing and can actually lead to the client paying their account later and later. So on the odd occasion that this happens I need to “nip it in the bud” so to speak.

Conversely, I expect our clients, not to ignore their debt to us and to come to me if they are unable to for one reason or another to pay by due date. Believe you me there is a lot of expense involved in chasing bad debts.

Observation, Concern and Tips

I have been observing for some time now that the length of time that it is taking Debtors (People who owe money) to pay their Creditors (those that have extended them credit) is increasing to anywhere from fifty- two (52) to ninety (90) days. This is even when the invoice states that payment is due within seven (7) days.


Debt - Male  Debt - Female







This is concerning me as having been there I empathise with all concerned and I am seeing the following results of this:

  • Businesses are becoming a bank for their Debtors,
  • The bank overdraft, if the business has one, is being blown out,
  • Business owners having to prop up the business by injecting their own funds, and
  • The financial, physical, emotional and stress related issues not to mention the personal relationships being under pressure.

What can be done to address this situation that I am currently observing?

The biggest problem to solving this situation is us, and I include myself in this, in that we suffer from a confidence issue. If our work is of a good quality, we are not doing a lot of rework and our clients feel they are getting value for money, we deserve to be paid on the due date. Where we fall down, a lot of the time, is in not following up and asking for payment.

As a business owner here are some steps you can take with your clients:

  1. Always produce good quality work that is value for money,
  2. Always issue an invoice when the job is completed or at least within 24 hours,
  3. Stipulate on the invoice in bold letters when the payment is due and the date payment is due,
  4. Ensure that a payment which is due on the 20th of the month following is dated the last day of the current month and not the first day of the next month. Why is this, because an Invoice:
    1. Dated 31st January 2015 is due for payment 20th February 2015 equals 20 days of credit,
    2. Dated 1st February 2015 is due for payment 20th March 2015, equals 48 days of credit,
    3. The maximum credit that should ever be extended for any payment which is due on the 20th of the month following is 51 (31+20) days.
  5. Ensure that you have a good Debtors Record so that when the payment due date has been breached you are aware of it so that you can follow up as to why it hasn’t been paid. If you do not wish to follow up on overdue payments yourself then please contact us regarding this.
  6. On the rare occasion that we have had a delinquent debt we have stamped the invoice, with this stamp, we had made up. We found it to be very effective.


Note: You can find this stamp at xstamper.com

  1. You may wish to impose a surcharge of X percent should an invoice be delinquent and you could put the verbiage on the invoice in BIG RED LETTERS so that it is very clear.
  2. Be willing to stop working for the worst offenders. Not easy but well worth it.

As a business owner here are some steps you can take with your creditors:

  1. On the odd occasion that I was aware that I was going to have a problem paying a creditor, because I had a good payment history with them, I found them to be very understanding and we were able to come to an arrangement.
  2. Always be upfront with your creditors and if a problem arises that could affect your being able to pay their account go to them sooner rather than later.

Remember that this time of the year, for New Zealand, is very prevalent for debt problems.

Why is this?

  • Firstly, businesses have just gone through the Christmas / New Year Holiday Season,
  • Secondly, if they are GST Registered and have 2015 Provisional Tax to pay. Both were due on the 15th January 2015,
  • Thirdly, the next lot of GST is due on the 28th February 2015.

This should not make any difference to my being paid what I am due, I hear you say. I totally agree with you and why I wrote an article titled The Simple way to save for business taxes. Unfortunately the reality is that not many embrace this concept.

My observation of the current debt situation is that the Debtor continues to take “Drawings” whilst not making an effort to either pay the “Debt Owed” or approach the Creditor and explain why they are unable to pay.

Thank you for taking the time to read this. I trust that the above has been informative and if there is any aspect that you wish to discuss further please contact us.

Disclaimer: This publication has been carefully prepared, but it has been written in general terms only. The publication should not be relied upon to provide specific information without also obtaining appropriate professional advice after detailed examination of your particular situation.

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