Just pay that debt!

IT is not business as usual in Zimbabwe.

As the 17-year fallout between Zimbabwe and some international financial institutions continues, albeit less marked than it initially was, interest rates on the local market — obviously affected by the country’s inability to access cheaper sources of income — have been unbearably steep.

Local business conditions have also not been favourable.

A lot of companies are currently stewing in debt, while, by implication, a lot of companies are also failing to recover money from debtors.

It is now a vicious circle.

When companies fail to settle their obligations on time, it doesn’t augur well for the economy as this significantly affects well being of firms.

So, there is need to take every step possible to ensure that at the very least businesses commit to repaying their obligations.

Whatever the case, the situation should improve.

Most worryingly, it seems companies that are owed by State-owned enterprises are the ones that suffer the most.

This is hardly surprising as parastatals such as the National Railways of Zimbabwe, Grain Marketing Board, Cold Storage Company, Ziscosteel and Air Zimbabwe are not in good shape financially.

In fact, they need to be restructured.

Apart from debilitating inter-parastatal debt, SOEs also owe significant amounts to private companies, which critically affects the latter’s cash flows.

It all has the potential to become very messy.

Experts often argue that fledgling enterprises can be hit with serious problems if their finance, operations, and or investing activities aren’t running efficiently.

For example, if your debts are due before your money from a sale you haven’t collected yet come in, you are likely to face serious cash flow problems.

Cash is king and failure to collect results in problems.

But it is spacious to assume that parastatals are the source of most woes faced by industry.

Far from it, inefficient business processes can also materially affect revenue generation and the ability of a company to settle its debts.

Admittedly, a lot of local companies are still using antiquated and dilapidated machinery and equipment, which make them uncompetitive relative to their peers in both regional and international markets.

National policies and tax laws need to be looked into as well.

Once a tax invoice is issued to a client, from that point, the Zimbabwe Revenue Authority (Zimra) will naturally begin expecting their dues.

For instance, for trade receivables worth US$2 billion, value added tax due to Zimra at 15 percent is US$300 000, while income tax can be calculated as US$500 000 at 25 percent.

With penalties and interest, the balance owing to Zimra can easily grow to over US$3 million if companies fail to make their payments on time.

Such issues need to be addressed by Government for they affect the smooth running of businesses.

Even though Zimra says one should prove the bad debts, it is not that easy.

Such challenges make it prudent for companies to first check the credit history of clients in order to profile them accordingly.

If a client has a poor credit history, a company can therefore budget for late payments.

As badly as one might want to make the sale, late repayments can potentially hurt the business.

It therefore becomes critical for businesses to assess customers that pose a risk to a company and those that have the propensity to make late payments.

A debtor’s book that cannot be easily liquidated into cash has no use in business.

Essentially, companies trade to make money. But there are always tell-tale signs that a customer will fail to pay his debt, and failure to pay a deposit upfront can be one of them.

It can be very damaging to be desperate to push sales, particularly for a company that is not performing well.

Speculating without any reasonable basis that somehow the fortunes of the business will change for the better might not be advisable.

During trying economic times, where conditions are usually fluid, it might be important to aggressively follow up on debt.

Negotiating a credible payment plan has proved to be helpful for many a business.

Quite clearly, desperation can lead to disaster.

Suffice to say, businesses have to be wary of their cash flows and closely watch their debtors.

 

Taurai Changwa is a member of the Institute of Chartered Accountants of Zimbabwe and an estate administrator with vast experience in tax, accounting, audit and corporate governance issues. He is MD of Umar & Tach Advisory and writes in his personal capacity. Feedback: [email protected] and WhatsApp +263772374784

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