Are You Contributing To Your Company’s Bad Debt?

Man in a suit pointing his finger.For most service providers or suppliers, it seems impossible to get payment in advance. Without realizing it, our internal operations increase the likelihood of a customer failing to pay.

There are actions or inactions that can contribute to or be the direct cause of our bad debt. While the following illustration discusses a client in the trades, it is applicable to all businesses.

To illustrate, here are a few scenarios that can lead to bad debt:

  • Client does installations and sells maintenance agreements, which provide for continuing revenue and the majority of his profit. Client sends out monthly billings to clients. Upon review of the receivables, client realizes that only 70% of the customers are somewhat current with payment. The other 30% are past 90 days.
  • The same client who does installations bills 25% and receives payment upon signing the contract. and before ordering the goods. They bill for and receive another 25% once they deliver the goods. The customer now owes 50%. They will pay 25% before the installation and the remaining 25% after installation is complete. Upon review of the client’s outstanding receivables, several customers owe 50% of the balance at the time of install.
  • The installer has performed but missed their right to lien the job. Which means that the receivables are out at least 90 days before they are able to act on them. Because their credit policy is strictly adhered to, they can step back and trace the receivables to late billings.

These three illustrations demonstrate a breakdown in business process. While the installer has successfully identified their receivables, in the first example, they have been able to isolate the receivables that originate from installations and maintenance contracts.

In the second illustration, they have been able to identify the receivables that resulted from released product and the project moved forward before securing the requisite 50% pursuant to the terms of the credit/collection policies.

In the third illustration, they did an excellent job of using the data to identify missteps in the business process. They could understand the origin of the receivables allowing them to identify how they are contributing to their own bad debt.

Considerations to Avoid Delinquent Accounts

In an effort to avoid delinquent accounts, the client has a credit policy that they strictly adhere to. They also have a collection policy that provides for the timely filing of liens, contact to nonpaying customers, and other collection efforts. Why then do they experience delinquent accounts?

If you exclude the possibility that there may have been a problem with the product, installation or maintenance making nonpayment in whole or in part justified, there remains the fact that the credit policy might need a little tweaking. The goal is to avoid doing business with prospects that they should have known were never going to pay.

  • Besides tweaking and adhering to the credit policy, the credit policy may not be reflective of the client’s risk tolerance.
  • The client might have made an exception in the credit policy for one or more customers and made the sale anyway.
  • The client might have been a little too relaxed enforcing their collection policy.

Improve Avoiding Bad Debt

We can always do a better job. We can avoid making a sale to a customer who leaves us with an uncomfortable feeling. If the customer has an issue with accounts receivable, they immediately are put into collection, or it might be time to fine tune your collection policy.

Your credit policy and business practices could be the culprit in rising receivables. Thoughtful analysis, methodical, and periodic review of the receivables will offer tremendous insight to necessary changes in credit terms.

We can help you analyze your receivables and credit policy. We consider the following and suggest a review of every receivable to see where the process broke down:

  • Setup of the account
  • Extension of credit
  • Sale
  • Delivery
  • Billing and/or collection

Segregate receivables by commonalities to expose and then remove the weak links. Factors considered are:

  • Age of the receivable
  • Size of the receivable
  • Customer characteristics
  • Underlying transaction creating the receivable

By analyzing the data, effective changes in the business work process can be made to help improve your bottom line. Reach out to our office and engage FFGN to help you to strengthen your policies and processes to avoid delinquent accounts.

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