Amount owed to UK firms rises 40 per cent

Law firm Lovetts warns companies not to focus all resources on chasing large debts but to ensure a balance

Paying up: UK businesses seem to be prioritising bigger debts in Q1

UK businesses are putting their cash flow at risk by focusing too much time on chasing large unpaid debts, Lovetts has warned.

The debt recovery law firm, claimed the fact that credit managers have relaxed their commercial debt management strategies in the first quarter 2010 shows a recovery in business confidence, but stressed that cash flow could be compromised if all efforts are focused on debt recovery.

According to Lovetts, the average commercial debt being chased for payment in Q1 2010, rose by almost 40 per cent compared with Q4 2009, which suggest businesses are prioritising bigger and more significant debts.

The length of time spent chasing payments has also increased, with late payers getting an extra five days to pay before receiving a letter before action (LBA), and an extra seven days after the LBA has been issued, before a claim is made.

Lovetts is warning that the renewed confidence could be short lived if firms fail to apply stringent debt management controls across the whole of the business.

Charles Wilson, managing director of Lovetts, said: "As the old adage goes: 'look after the pennies and pounds will take care of themselves'. When it comes to debt recovery, the message is not far off this.

"It is of course vital for companies to chase up the large outstanding payments, but by ignoring the smaller ones, there is a danger that these sums will soon accumulate, putting cash-flow at risk," he said. "The cost of issuing a LBA to chase up payments is extremely low in comparison to the amount of outstanding debt many businesses are facing. It makes enormous financial sense therefore to chase up all overdue debts to improve cash flow."

Wilson said compared with 2009 firms are waiting more than 25 days longer before issuing an LBA.

"This delay could be costly, and puts companies at greater risk in what is still an incredibly uncertain economic environment," he added. "The quicker businesses chase up payment after the 30, 60 or 90 days of the payment terms has elapsed, the quicker they will see the money."

He added that the next 12-18 months were "pivotal" for UK businesses, with pursuing debts more effectively possibly spelling the difference between success and failure.