To minimize bad debts, businesses should qualify customers before granting credit, have an aggressive collections strategy, and create a financial buffer. Credit checks can determine if a customer is likely to pay on time, and a collections process should include reminders and phone calls. In cases where debt will never be paid, it must be written off, and a bad debt account can help offset losses.
Bad debt management is a task virtually every business has to deal with in order to protect its interests and remain a viable operation. Debts of this type include any customer obligations that are likely to remain uncollectible and will ultimately be written off as a loss. To keep bad debts to a minimum and protect the company from being hurt by bad debts, it’s important to qualify customers before doing business with them, have an aggressive collections strategy in place, and also create some kind of financial buffer that can offset any debt you owe. is finally uncollectible.
One of the best ways to structure a bad debt management strategy is to run credit checks on customers before granting them credit lien. By analyzing a prospect’s financial situation, the company can determine whether the customer meets the basic criteria needed to extend a line of credit or even if the prospect is likely to pay monthly invoices in a reasonable amount of time. If there are indications that the customer is more likely to default, the business may choose to require payment for goods and services upon delivery or set limits on how much credit is extended to that customer.
In addition to establishing skills on the front end, bad debt management also requires creating and maintaining a viable collections process. Here, the idea is to have specific steps that are initiated as the debt obligation ages. Typically, this will include reminders when the debt crosses the 30, 60, and 90 day marks, with phone calls beginning to occur when the debt is approximately 45 days old. In the event that internal collection efforts are unsuccessful, turning the debt over to a collection agency is opting for write-off as bad debt is typically the next step. If the collection agency recovers the outstanding debt, it can always be re-recorded in the company’s books at a later date.
There will be situations where the bad debt management process involves debt that will never be paid off, such as in the case of a debtor bankruptcy. Here, the debt must be taken as a business write-off in order to claim any kind of tax relief from the loss. In many cases, companies create a special account known as a bad debt account or buffer account that helps offset some of that loss. Buffer accounts are funded from surplus earnings and typically represent a percentage of any current receivables above the 90-day mark. With this bad debt management fund, the company has reserves that help offset debts when all collection efforts fail and there is no real chance of collecting the customer’s debt.
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