Writing off Debt: the effect on your business and bottomline

Writing off a debt is never a pleasant process. It means a loss for your business. It also means you have exhausted every avenue to find a way for the account to be paid. But, eventually, that bad debt has to get off your books.

The how, the why, and the wherefore

• Bad debt accrues when monies that should be paid by a certain date are not paid, and after much effort become unlikely to be paid forever. In the normal way, monies owed are added to your books and considered assets, under the assumption they will be paid by the end of the year. But once a debt reaches 90 days old, it becomes increasingly harder to collect. You may also have some history with your customer that will indicate whether you are ever likely to be paid.
• Obviously, bad debt is not good for your business – and many businesses lose a large percentage each year. Some companies prepare for it by including these potential losses in their budget – but it is still not an acceptable engagement with a client. Money lost this way has to be made up elsewhere – either by raising prices or working harder at sales.
• Once a debt is written off, then you cannot contact the customer and ask for the money at a later stage. Once it is off the books, that is the end of it. But before you get to this point of writing off a debt, you will need to have followed several steps such as contacting the debtor, both telephonically and in writing. Following this, a commercial collection agency, a collection lawyer letter, or processing through the courts are all options.
• Be persistent in pursuit. Never give up until you absolutely have to – and that point is reached when the chase becomes more expensive than the retrieval of the money. Sometimes your debtor may be bankrupt (so you’re riding a dead horse) or their business might be going into liquidation. You might still receive your money eventually in this latter scenario, but keep your eye on the process. But sometimes your client may simply have forgotten to pay.
• When pursuit becomes costlier than the debt itself, it’s time to write it off as a business expense. Because the damage to your business can be considerable, you must have strategies in hand to reclaim monies owed. You can put their credit account on hold, negotiate partial payments, or have an arbitration method to avoid going to court. But once it is clear that the debt is not worth it, or that it will never be repaid, you have no option but to write-off the account.

Preparedness and strategy

Bad debts are a concern throughout the business world, so be prepared. Have a strategy to hand, and the right people on your side. There are some basic steps to follow:

• Make the necessary calls, regularly and persistently; be ready to discuss the circumstances of the debtor; send a formal letter of demand and attach payment options. Negotiations can be difficult and dragged out. Also, debtors may leave town without leaving a new address in order to avoid payment.
• This is the time you will definitely need the assistance of professional debt collectors. They have tried and tested search methods to locate the debtor – as well as information on aliases, bankruptcy status and any criminal records, etc. The most important gain is your time and resources.
• Once you have taken legal action without results, then it’s time to shelve the case, and look at the damage. From this process and experience you will learn to vet your customers with more care: having clear terms and conditions; monitoring your customer’s finances; sending regular reminders; providing different types of repayment options; developing an effective strategy.
• Once you write off an account, it has a ripple effect on your entire business. It is not just the balance that is written off, it is time that you lose. And time is money. There is the time spent on the initial effort of getting the deal; time paying marketing bills; time of sales staff closing the deal; time of accounting staff recording the account; and time of collection staff chasing the payment.
• Usually small accounts are written off because their value does not justify the resources required to collect them. However, if their volume becomes substantial, the accumulated amount will weigh heavy on your business – a strain that will merely increase as time goes on.
• In short, bad debt is expensive. Often the accumulated costs of bad debt exceed the written-off amounts. Its impact is twofold: hurting the bottom line with the loss of the monies that you are owed, and restraining the growth of the top line. Bad debt has a detrimental impact on your cash flow and impedes the profitability of your business.
• The other bad thing about bad debt, is that written-off accounts tend to fade into oblivion. When they are not open on your books, there is little incentive to resume the chase. What you may end up doing is practically granting debtors financing for free. To save your business, both top and bottom line, writing-off should be a last resort.

LegalTrack – how we do things differently

At LegalTrack we work with real people with real problems and therefore we apply a highly considerate and respectful approach to debt collecting. We understand that we need to be firm, but we are also aware that to negotiate successfully with an individual who is already in a difficult financial position, we need the skilful combination of empathy and experience, backed by well-honed communication capabilities. Our modus operandi is simple, direct, efficient:

• Our first contact is via an SMS.
• This is followed by a phone call to begin the negotiations on how the debt will be paid.
• All payment arrangements/negotiations are confirmed via letters, emails and text messages.
• Our promise is to constantly keep contact with our debtors in terms of all arrangements.
• Any legal action is considered the last option.

Please find out more at: www.legaltrack.co.za