Bad debt collections
Before starting with bad debt collection? Let's learn what is a bad debt? And when does a bad debt occur?
What is a Bad Debt?
Well, a bad debt is nothing but the amount or the money owed to you that you can't collect. For instance, say yours is a business of selling products or services, you would undoubtedly have debtors in your business. Debtors are the customers who usually fail to pay for your products or services.
When Does a Bad Debt Occur?
Briefly speaking, bad debts usually occur when products or services are offered on credit. Many customers purchase products or services on credit, with a promise to pay the due amount on a particular date. This is simply because some customers simply need a little more time to pay, but others (hopefully a very few!) never will or don't just intend to pay, by which the returns from the sale is never realized.
Besides costing money, bad debts create complications in accounting as well. As like many other business entities, if yours is also an accrual-basis accounting then you must obtain your returns/earnings at the time of sale itself, and not when it actually comes in. Because of the lag in time it's oblivious that the non-paid sale becomes an overdue account. To recover the overdue amounts you go through various bad debt collection procedures. Alas the overdue account in due course becomes a bad debt, which you may realize only when it's too late for the later tax year.
Avoid Bad Debt Collection!
As mentioned in the aforesaid paragraphs, a bad debt occurs after all attempts are made to collect on the debt are futile.
Although, some companies think that it would be easy to say that bad debt collection is an easy task that they possess, which is not always true. There are numerous struggles that bad debt collection companies go through which makes it really difficult to collect the owed money. There are numbers excuses that are made by the debtors, which instigate the bad debt collectors to loose their nerve, for instance, disconnected phones, or unanswered calls, etc.
A simple solution is to avoid giving credits. Although it is true that making sales on credit generally increases the sales. But, avoid giving excess credits to customers with less than desirable credit, in turn to avoid the hassle of bad debt collections.
Conclusion
The accounting solution is the best one to make an allowance for bad debt collection, matching the bad debts against the sales when the bad debt accrued and making a "Guesstimate" of the amount.
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