While many of our clients are individuals and sole proprietors, we also work with businesses and other types of organizations struggling to collect from uncooperative debtors. These types of clients tend to have something in common: their uncollected judgments are negatively affecting both business valuation and cash flow.
In a nutshell, uncollected judgments reduce cash flow by locking out expected revenue. A company might be forced to cover the shortfall either by borrowing or by delaying its own payments to creditors. The overall effect of doing so ultimately reduces the company’s valuation.
Specific Cash Flow Impacts
Allowing money judgments to go unpaid often has very specific impacts on cash flow. For purposes of illustration, let us focus on money judgments resulting from cases of unpaid customer invoices.
Prior to the litigation, the creditor was expecting the invoices to be paid on time. They were not. Post-litigation, the invoices remain unpaid. But the judgment also includes monies to cover the creditor’s court costs as well as late fees, penalties, and interest. This is all money the creditor is expecting to maintain proper cash flow.
In the absence of that cash, a company could face serious problems:
- An inability to make payroll
- Delayed inventory purchases
- Limited cash to cover daily operations
- Late debt payments
Every business needs a certain amount of cash to keep things going day-to-day. Moreover, certain types of liabilities cannot be covered with credit. Employees will not accept IOUs as payment for their labor. So the company must have adequate cash flow to cover paychecks.
Business Valuation Impacts
Although less immediate in nature, the impacts of unpaid judgments on business valuation are very real. The underlying principle here is the fact that unpaid judgments are negative assets. They are identical to business debt in their impact on valuation.
Unpaid judgments reduce a company’s net assets and profitability. If a company chooses to no longer pursue a given judgment, it is likely to be written off as bad debt. Meanwhile, lingering judgments represent a risk to potential buyers. A buyer considering purchasing or investing in a business would likely reduce its offer upon discovering unpaid judgments during due diligence.
The Costs of Ongoing Legal Actions
Adding fuel to the fire are the costs associated with ongoing legal actions. If a company wants to seek writs of execution against the debtor’s property and assets, it’s back to court. There are fines, attorney’s fees, and other costs that come with such actions. And while such costs are necessary, they do not add a penny to a company’s cash flow or valuation.
The costs of ongoing legal action only serve to weigh down the company’s finances. So the sooner outstanding judgments are collected, the sooner such weights can be cast off.
It Matters How You Collect
If you are a business owner or executive currently looking at a number of unpaid judgments, know this: it matters how you or your organization goes about collecting those judgments. Money judgments are governed by a specific set of rules adopted on a state-by-state basis. So if you don’t know how things work in your state, you are already at a disadvantage.
In-house collection is possible. Plenty of companies try it. But we are convinced that in-house collection is rarely the best move. Instead, it’s better to turn collection over to a specialized agency like Judgment Collectors.
Your company has expertise in its chosen sector. We are the experts in the judgment collection arena. So while you and your team go about doing what you do best, let us do what we do best: collect on your behalf.