Managing Trade Receivables and the Risk of Bad Debts

An invoice issued is not cash collected. Between the moment you sell and the moment you see payment, weeks pass, sometimes months, and sometimes payment does not arrive at all. Trade receivables are often the largest item in an SME’s current assets, and at the same time the most treacherous: they represent frozen liquidity and, in the event of default, a dead loss. Managing them well is not bureaucracy, it is protecting your cash.

A receivable is immobilised liquidity

Every open invoice is your money sitting in the customer’s pocket. The longer the collection time, the more capital stays blocked and the more the company has to finance itself elsewhere to pay salaries, suppliers and taxes. The first indicator to keep an eye on is the average collection time (DSO): how many days on average pass between invoice and payment. If it rises, liquidity worsens even if turnover grows.

Clear payment terms from the outset

Many unpaid invoices arise from ambiguous terms. Conditions should be set before the sale, in writing:

An explicit payment term (for example 30 days from the invoice).
A possible discount for early payment, if it makes sense for your margins.
Payment methods and details without ambiguity.
For significant amounts or new customers, an advance or partial upfront payment.

In Switzerland, if no term is agreed, the receivable becomes due upon the creditor’s request and the debtor falls into default after a reminder (or, if a due date is set, automatically on that date). Setting the due date on the invoice simplifies everything that follows.

The reminder process

An overdue receivable must be handled promptly and methodically, not left to “settle”. An orderly process involves several stages:

First reminder shortly after the due date, courteous: often it is just an oversight.
Second reminder with a firmer tone and a new short deadline.
Final notice announcing the next steps.

Regularity counts more than harshness: the customer who knows they are being closely followed pays before the one who is forgotten. On significant delays, default interest can be charged (the Swiss statutory rate is 5% per year unless otherwise agreed).

When the customer does not pay: the enforcement route

If reminders are not enough, Switzerland offers a standardised procedure through the Federal Act on Debt Enforcement and Bankruptcy (DEBA/LEF). It starts with a debt-enforcement request to the Debt Enforcement Office, which serves the debtor with a debt-collection order (precetto esecutivo). The debtor can file an objection; in that case the creditor must have it lifted through the courts (dismissal of the objection), which is all the easier the more the receivable is documented by clear evidence — contract, invoice, acknowledgement of debt. This is why orderly documentation of the commercial relationship is the best insurance: a well-documented receivable is far easier to recover.

The accounting treatment of bad debts

On the accounting side, a receivable whose collection is doubtful cannot remain on the balance sheet at full value: the prudence principle of the Code of Obligations requires it to be valued at what is realistically collectable. A distinction is made between:

Specific write-down: for individual receivables genuinely at risk (customer in difficulty, disputes, enforcement in progress).
Flat-rate write-down: a prudent percentage on total receivables to cover the generic risk of non-collection.
Definitive loss: when the receivable is unrecoverable (for example on the fruitless closure of enforcement), it is written off.

It should also be remembered that a value adjustment affects the VAT already paid: on definitively uncollected amounts, the tax declared at the time can be corrected according to the applicable rules.

Reducing the risk upstream

Recovering a receivable costs time and money; preventing it costs far less:

Check the creditworthiness of new customers before granting significant deferrals.
Do not concentrate too much turnover on a single customer.
Invoice promptly and accurately: delays and errors lengthen collection times.
Monitor overdue amounts every week, not at quarter-end.

In summary

A receivable is immobilised liquidity: measure the average collection time.
Set payment conditions and terms in writing before selling.
Regular, methodical reminders recover more than occasional harshness.
The enforcement route (DEBA/LEF) works better with well-documented receivables.
The prudence principle requires doubtful receivables to be written down.

How we help you

We set up receivables management for SMEs — terms, reminders, correct write-downs in the accounts — and support you in keeping the accounts in good order, which makes every receivable easier to defend and recover. We put your receivables in order.