Bad debt expenses in business are those accounts receivables that have gone into severe default and are considered a loss. For businesses that operate cash only or payment upon service or purchase don’t have issues with bad debt expenses. However, some businesses, to some degree, feel they need to operate by extending some credit.
If your business accounting shows your bad debt expenses to be high, you need to consider reassessing your accounts receivables. Here are five ways to lower or eliminate bad debt expenses and increase your company’s revenue.
Review of Credit Policies
You should be reviewing your accounts receivables monthly and noting what customers are late or possibly going to become completely default. If you have some customers who consistently pay late or default, you may consider changing them to cash-only or payment on receipt.
If you have multiple customers paying late or not, you may want to contemplate eliminating accounts receivables. You have to make tough financial decisions that have the best interest of your company in mind. While you want to be accommodating to your customers, it should never be at the expense of your business.
Eliminate Terms
Any credit terms, whether 30, 60, or 90 days puts your business at risk. Giving long terms of payment can cause your bill to be forgotten or ignored. You may need to consider eliminating these payment terms or only offering these types of payments to specific customers on a case-by-case basis.
Early Payment Discount
If you continue to offer 30, 60, or 90-day payment terms, you can offer various early payment discounts. Many companies that offer early payment discounts will give a significant discount if paid on the day of purchase or service. You can also offer lower discounts if paid earlier than the due date.
This discount will allow you to offer payment terms and give your customers the incentive to pay when the products or services are received earlier than the due date. Despite the discounts, if every customer is paying on time or early, your company revenue will increase because you will be clearing your accounts receivables.
Collection Policy
If you opt to continue allowing your customers to make payments or buy now and pay later, you will need to put a collection policy in place. This collection effort will be a regular interval at which you will send reminders and follow up with phone calls.
You must set a collection policy that will make sense to the due dates and provide the customer with reminders while not overwhelming them. Customers have often forgotten the payment, and gentle reminders will encourage them to pay without alienating them. It is suggested that you have three reminders. One reminder sent at the 30-day late mark, then another at the 14 days from the first reminder, then a final phone call seven days after the previous reminder.
Collection Agency
A collection agency would be the last resort but may become necessary to recover at least a percentage of the receivable from your defaulted customer. After your final phone reminder, you should give them seven days then look to turn the debt over to a collection agency.
A collection agency will buy the debt for a percentage of the total account and attempt to collect the full amount or even the full amount with penalties from profiting from the purchased debt.
Conclusion
While your customers are important, and you want to retain as many as possible for your business, you have to take steps to eliminate or lessen bad debt expenses. Your business has to make a profit to survive, and the more bad debt expenses you have, the lower your profits. Some businesses get into trouble when these bad debt expenses exceed profits; therefore, you must consider some or all of the ideas on this list to help eliminate it.
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