There are a number of ways of dealing with bad debt. Firstly, it depends upon whether the debt you’re chasing is from a firm that is in administration or not.
It’s best not to wait for a company to go into administration before taking action on bad debt. Once you have done work or provided services to your customer, you are owed money & it is worth having a process in place to take action. Many business owners hate chasing debts as they do not want to feel awkward; a process for overdue invoices can make things simpler as it will ensure that you chase the debtor and feel comfortable about doing this – if there is a clear, routine process, it is easy to be consistent with debtors and it allows you to refer clients to your debt collection process rather than worry about your relationship being damaged.
Part of that process may be debt collection or credit control, services that we would love to undertake for you or that you. Having a process that includes these elements is important as failing companies will often find it difficult to meet their obligations. It’s easy to think “X always pays late & so there’s nothing to worry about” but this person may be paying late because they’re in financial trouble. If you put off collecting debts until it’s too late, you risk not being able to recover the debt at all. When this happens, you might as well have not done the work in the first place & saved yourself the hassle.
There are signs that a company might be failing or that you won’t be paid:
- Payments are increasingly overdue
- They don’t call you back
- They claim that the cheque is in the post
You might consider setting up a bad debt provision in your accounts. This doesn’t remove the entry from your sales ledger but it does get accounted for in the same way. It is best to do it this way because once you permanently write off bad debt you will lose track of it; if you provide for bad debt, however, you’ll see in your aged debt analysis that the amount is still owed. This can help if you’ve not yet decided to write-off the debt.
If the firm is in liquidation, you can write off the sales ledger & reverse the bad debt provision.
We would obviously prefer that it did not come to this for you. Bad debts can have huge effects on a company in terms of lost income but also lost time spent chasing debts. It can be really draining. If you can ensure that your credit control process ensures that customers are clear about your payment terms, that they are clear about what will happen when they go overdue and that they are chased up regularly either by your team or by a debt collection agency, you will minimise the debts that go overdue, giving you a healthy cashflow and minising your bad debt risks.