3 Reasons Past Due Receivables May be Worthless

Customers; every business must have them. We are in business to make a profit but we cannot do that without serving customers. But, if you sell on credit you will at some point have a customer who fails to pay on time. It is critical to stay on top of this or a receivable may become a bad debt.

Two things to remember:

  • A bad debt is worse than losing a sale as you not only lose the revenue but also the cost of the product and other resources devoted to making the sale.
  • A sale is not really final until converted to cash.

With these two things in mind, I would like to focus on 3 reasons past due receivables may be worthless.

The Customer’s Status

Sometimes we let a customer stretch their payments only to learn that we have let it go on too long. As an example, a company could be bought and we find ourselves trying to collect from new owners. Another situation is when a customer goes out of business. I recall a situation where the customer received services for an apartment that was torn down before the sale was ever collected. What do you think the probability of collecting that was?

The Product

Occasionally when a past due customer is contacted they begin to raise an issue about the quantity they actually received, or that the product was defective, or a whole host of things. They may claim the product is now obsolete and they want to return it. Although any of these can be legitimate, often it is a stall and attempt to avoid ever paying the bill.

Relationship

Sometimes our relationship with a customer is strained for any number of reasons. In some of these cases we are willing to forego collecting an account out of concern for future business with the customer or for our company’s reputation.

So there you have it- 3 reasons past due receivables may be worthless. But we don’t want to end without talking about the solution to this problem.

The Key is to Communicate

In order to avoid experiencing bad debts, it is critical that we communicate clearly with customers. This needs to be done from the beginning. We should make clear what they can expect from us, what the terms of the sale are, and what our expectations are. Then, we should follow up on a regular basis but not just to remind them they owe us. We need to check up on their satisfaction with our product, service, and performance. This is a great way to not only prevent collection problems but also learn ways we can improve.

Are you in regular contact with your customers? Are you sidestepping a conversation with them because you fear the result?

If you want to know more, contact AimCFO – Contact

As always, your comments are welcomed.

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