/When Should You Write Off A Debt?
Debt Collection Sydney

When Should You Write Off A Debt?

In the old days, debt collection involved big, scary-looking men with ham-sized fists, barely hidden weapons, and intimidating eyes. Fortunately, that doesn’t happen anymore, at least not in civilized business spaces. Nowadays, you can hire a professional debt collector.

Modern debt collection agencies look more like lawyers than bouncers, and they often work with lawyers to make sure you get your due. They work with both large and small businesses, and the way their industry is set up, you get highly discounted legal fees.

Of course, courtrooms aren’t the first stop for today’s debt collector. They have an efficient, proven system. They will begin with phone calls and letters. If your debtor is in hiding, they can trace him or her and pursue your money. Then – if needed – they’ll bring in the lawyers.

For individuals, this may seem like a large unnecessary expense, but debt recovery firms are set up to give you a good deal. Plus, depending on the size of your debt, it will boost business and give you peace of mind. It gives you the time and space to focus on building your business and boosting your income while someone else chases the cash you’re owed.

When a customer or business owes you money, you might think it’s inconvenient, but it can have fiscal implications for you as well. For example, it can affect your cash flow. It can interfere with your ability to pay your employees or restock your supplies.

Debts can also affect your credit worthiness, and impact your relationship with your bank and other financiers. Your debtors may accrue interest by delaying payments, but often your business incurs costs as well, especially in the finance sector. And it hurts your DSO.

That said, even with the services of a good debt collection agency, there are times when the hassle is no longer worth the time, effort, and expense. How do you make this decision? There are two standard approaches to the issue of writing off debts.

Some companies prefer not to have the bad debts in their books, so as soon as they hire a debt collector, they strike the debt off their accounts. This way, it doesn’t harm their A/R, and if the debt collectors recover the cash, then it becomes an bonus.

While this option takes the pressure off and keeps the books looking good, it can cause problems later since your ‘clean’ books aren’t as accurate as they appear. This factor can create issues in case of additional finance needs via IPO, loans, or venture investors.

Some companies that use this approach have their own way of balancing books. One option is to create a recovery account. As soon as debt collectors start their efforts, the debt is written off to remove it from A/R, and if the collectors manage to get the cash back, it’s deposited in recovery. This ‘back-up’ account off-sets bad debts in the future.

Your business can also create a ‘clearing account’ to keep A/R clean. Others prefer to immediately declare due funds as bad debts. Both these options offer your business tax relief on the unpaid cash, and your tax team can figure out the best approach to that matter. When you use a recovery or clearing account, you can bill collector’s fees as a sales expense.

The second choice is to keep the debts on record until your collection agency admits defeat. It may leave your books looking less than optimal, but it gives an accurate reflection of your cash flow. Some companies prefer this option because it shows the direct results of business decisions and keeps them sharper in future financial decisions.

Companies that use this approach are often more philosophical in their business ethos. They feel that since they took the risk, they have to accept the consequences without sugar-coating. It motivates them to be more cautious on future deals by giving them an instant overview of the cash they have ‘gambled’ to unwise deals.

However you choose to deal with your debtors, there are five situations where you have no real choice in the matter. When the following cases arise, you’ll have to dust yourself off and move on. The situations are as follows:

  • Your debt collector gives formal written confirmation that the debt is uncollectible.
  • Your debtor has run off, and your collector is unable to find them.
  • Your debtor has declared bankruptcy.
  • Your court case has gone in favour of the debtor.
  • Your recovery costs exceed the debt itself.

If you find your business in any of the above scenarios, then it’s – unfortunately – time to cut your losses and proceed to the next deal. Better luck next time …

Related Articles:

4 Signs You Need to Write Off a Debtor

What’s the Best Time to Write Off an Account to Bad Debts?