Incurring multiple bad debts can cause serious cash flow problems. Don’t let this happen to your business. Maintain a strong bottom line by learning how to avoid bad debt in business.
Bad debt is a receivable that you cannot collect because your customers show no intention, or are incapable, of paying the monetary amount they owed to your business.
It happens when customers buy a product on credit rather than paying up-front. If they fail to pay for their dues, your business may lose that amount. Instead of earning from sales made through credit, it turns into an expense.
Neglecting a bad debt can wreak havoc on your cash flow. Not only does it reduce the capital for your daily operations, but it also prevents your business from growing. If the total amount of bad debts piles up, you may even run the risk of bankruptcy.
While it’s true that you can’t totally avoid bad debts, you can still have them under control. Before you extend another credit, learn the policies and procedures you can implement to prevent bad debts.
Protect your business from incurring bad debts by executing efficient rules around credit management. Here are some best practices you can follow:
Not all customers are good for your business. If your goal is to build strong and lasting relationships with your customers, you should make an extra effort to choose who you’ll want to work with.
To determine if it’s safe to qualify a customer for a credit plan, consider these steps:
Requiring customers to pay in cash lowers your risk of incurring bad debts. Its downside, though, is it may drive away a good customer who prefers to shop using credit cards.
Set reasonable credit limits for new customers according to their creditworthiness. It’s important to play safely first until you can affirm their reliability. Once they give you the guarantee of being good-paying customers, you can start increasing their limits.
Clearly state in your terms of trade agreement the conditions and penalties for late payments. Make sure your customers understand what it means to prevent any miscommunications. Let them know of the penalties they may get due to late payment. Most importantly, ensure that they agree with your terms through a signed document or a confirmation on your website.
Staying on top of your finances lets you determine customers who are paying on time unlike those who are falling behind. Hiring an accountant helps you organize and improve your accounting processes.
With extensive knowledge about how business accounts work, an accountant can provide you with insightful reports on your current financial standing and effective strategies to improve it.
Let your customers know how serious you are when it comes to collection. This way, they will prioritize you over other creditors. Some of the activities you can do to ensure you’re in front of your customers’ minds are:
Track delinquent accounts faster and more accurately with the use of cloud-based software. It can help you automate most of your debt collection processes, allowing you to save time and effort in bad debt recovery.
Recovering bad debts takes a lot of effort. Before you reach the point of chasing after non-paying customers, it is better to prevent it by developing tight credit policies and procedures.
Managing the financial aspects of your business can be challenging, especially when it comes to preventing and handling bad debts. If you find yourself in need of professional assistance, consider D&V Philippines.
Our team of skilled accountants is dedicated to providing the support and guidance you need to steer your business clear of bad debts and towards financial stability. You may schedule a free consultation to learn how we can assist your business.
You can also check out what our satisfied clients have to say by visiting our testimonial page or get a copy of our whitepaper, Finding the Right Talents: D&V Philippines Solutions for Modern Accounting Firms, to learn how we invest in our talents’ professional growth and development so they can meet your standards and expectations.
This article was first published on 24 March 2021 and updated on 18 July 2024. Edited by: Angelica Garcia