Appropriate Management of Short-Term and Long-Term Debt
Appropriate Management of Short-Term Debt
Paying Creditors on Time to Obtain Discounts
The business should take advantage of any discounts offered by creditors for early repayment of debts. If there are no discounts, short-term debt should be paid within 12 months.
Separation of Duties
The role of handling of creditors and recording of accounts payable should be separate to reduce the chance of fraud.
Double Checking of Liabilities
Payments requested by creditors should be double-checked to ensure they are the correct amounts. Common scams that affect businesses are 'fake billings' that send businesses fake invoices for generally small amounts of money which are paid without checking if the debt was actually incurred by the business.
Short-term debt generally should not exceed the level of liquid assets. Situations, where short-term debt exceeds liquid assets, is an indicator of increased risk of default on short-term debt and could be an indicator of insolvency.
Appropriate Managment of Long-Term Debt
Authorisation of Large Long-Term Debt
Large long-term debt should be double checked and approved by a senior employee with an appropriate role in the business.
Debt Should be Sustainable
The business should only take on further debt if it is sustainable. The business should financially plan the repayment of debt, ensuring that operating cash flows are sufficient in ensuring a positive cash balance.