Writing off bad business debt should always be a last resort. Not only will it hurt your bottom line, but it will also hurt your company’s overall ongoing profitability. If you are struggling to collect payment for your account receivables, contact an attorney for legal advice and guidance. A business planning attorney can provide you with the tools you need to successfully collect every account receivable owed. Read on to learn more about how to setup an effective accounts receivables collection system and why small businesses should not write off bad debt.
- How To Establish A Workable A/R Collection System
Most businesses are unable to collect outstanding accounts receivables because they do not have a clearly defined system in place to do so. Your business should have a written policy in place that clearly defines how accounts receivables are to be processed. For example, you should have a written policy in place that defines how you want your customers to pay. Your policy should inform your customers about your standard payment terms (ex – Net 30 days) and the penalties that will be applied in the event the customer fails to pay within the prescribed period of time.
In addition, make sure the policy is clear as to when the collections process will begin and what will result if the customer fails to pay during this time. Whoever is doing the collecting on behalf of your business should keep detailed records of all collection attempts and, more importantly, know how to strictly follow the Federal Fair Debt Collection Practices Act (FDCPA) and the Florida Consumer Collection Practices Act regarding their activities. If you or your collections person are not familiar with these rules you may want to contact our office for additional advice on how to legally collect an outstanding debt.
- Collect Account Receivables In A Timely Manner
The longer your account receivables remain open, the harder it is to collect them. Studies show that once a commercial debt reaches 90 days old, it becomes practically impossible to collect. Make sure you set strict parameters as to how long your customers have to pay their outstanding account. Depending on the nature of the transaction, you may want your staff to sit down with your customers prior to commencing service to make sure they understand your account receivables policy. In addition, make sure all of your invoices include clearly defined payment terms. In your invoice, you may want to provide discounts for early payments and detail the penalties you will assess for late payments.
- When to Finally Write Off Bad Debts
Unfortunately, there may come a time when you finally need to write off bad debts. If your business uses the accrual method of accounting, you can write off bad debts. Use the direct write off method when estimating the total amount of debt you will not be able to collect. You can only write off bad debt once you give up on collecting it. So when should you pull the trigger? Our experience have taught us that if the debt has been aging for over 180 days, it may be time to give up on collecting it and write it off. If the customer has truly vanished, validly is disputing the debt, or is judgment-proof (legalese for “broke”), our firm’s advice will likely be that you write it off.