How Bad Debts can affect a Business
28

Nov 2019

Many times, a company has plans for the future of the company but does not have the appropriate funds to see these plans through. Under such circumstances, the company can opt for loans or borrow money from various other sources to fulfil its plans. Off late, debt is considered as a fundamental part of the business process, and it is expected that any business will take loans, but the company should not depend on gaining funds in such a manner.

Let’s understand more about debts, bad debts in particular.

Meaning of Bad Debt

If a client owes you money and you are unable to recover the money owed in any way possible, then you will have to write off the debt. This unrecoverable debt is known as a bad debt. A bad debt of a small value will not affect the company much, but if there are many defaulters or tremendous amount of money which cannot be repaid, then the company may have to file for bankruptcy.

There are several reasons why bad debts happen, but in the majority of the cases, bad debt is due to a change in the situation of a person or if the company does not perform the necessary background checks and offers credit to every customer. In both cases, the customer may not be able to repay the loan amount.

Effects of Bad Debts

Bad debt will have a significant impact on your business. These bad debts will not only affect the finances of a company; they will also affect the accounting process. The handling the bad debts in accounting is a very complicated process. Bad debts can complicate the process of accounting as they can make it difficult to understand when the sale was conducted.

A sale is considered to have happened when there is a transfer of objects, and there is a transfer of cash on the other hand. Only the removal of the object in question does not mean that a sale has happened. The process of accounting for a non-paid sale is different, which forces you to go through a varied collection and reporting procedures. This overdue payment, if remained unpaid, will turn into bad debt.

How can you Avoid Bad Debts?

One of the most effective ways of avoiding any bad debt is to make a plan for debt elimination. If one accurately follows the debt elimination plan, the company is sure to remove any threat of bad debts. Some of the methods of not gathering  bad debt are:

Credit Control

By having a valid credit strategy, it will be possible to understand the current financial situation which the management will analyse and find better and innovative solutions to the presented problem. A good credit strategy will help the company keeping a record of all the late payments and will ensure that the respective clients make the payments.

Due Diligence

This means that before handing credit to any customer, the necessary background checks should be performed. By performing a credit check, the company will remain informed with the current financial situation of the client and can take decisions accordingly.

Strong Communication

If the consumers have a good rapport with the consumers, you could directly ask the consumers to pay back what they owed. The chances are that they just forgot about it or the transaction slipped their mind. Keep in mind that this method will work only on the consumers having a strong relationship with the company.

Less Expenditure

The best way of controlling bad debts is not to provide credits to everyone. As more amount of credit will be given to the people, the risk of bad debts will increase. The funds left should be used for the development of the company.

Debt Consolidation

Debt consolidation means that all individual debts are combined, and a single debt is formed. This usually has a lower interest rate and offers flexible payment options.

These are some of the many methods through the company can reduce the risk of debt. Not having any such risk will help the business to grow further and flourish in the modern business environment.

Require a helping hand for managing the financial health of your company? Do not fret, JAXA Chartered accountants are here. We will not only take care of all the finances of the company but will also help you to take care of the company in a proper manner. To know about the services offered, contact us – we will be happy to help.