Bad debts are a result of unpaid and delinquent credit sales extended to customers. They are a huge pain because not only have they locked in cash within the invoices for a significant period of time but they too provided losses and zero profits. Truly, they are one of an entrepreneur’s worst nightmares. So we’ve taken it upon ourselves to ask our team of freelance accountants regarding the different means to reduce these bad debts and here is what they’ve got to say.
Draw up clear and effective credit terms. Call in the pros for sound advice on the matter too. It is important to devise clear procedures and rules at the onset not only for customers to abide by but also for the business to be reminded of.
Screen out the bad paying customers. Extending credit to everyone is plain suicide. You must be careful about delinquent and bad paying customers and make sure to never allow a credit sale transaction with them. To do this, perform some screening and enforce certain requirements.
Keep customer information updated. You have to send in invoices to facilitate collection and you cannot achieve this if you have the wrong names, contact details and addresses.
See to it that you send out the invoices on time. Tardiness on your part can also been tardiness on the part of the customer. You have to initiate punctuality and send the necessary documents and reminders the moment they become due. In fact, the earlier it is done then the better.
Don’t hesitate to call in. There will be cases where customers do not deliberately intend to miss out on their obligations but rather forget or unconsciously brush it aside for some reason. Call them up, send a reminder and clarify things. This is why you have a credit and collection department in the first place.
Impose penalties for lapses and rewards for promptness. Include in your terms interest penalties and fees for delayed payments and other lapses on the erring customer and open up discounts for those that are prompt and good paying. This encourages good conduct and discourages the bad. Ever heard of the rewards system?
Consider factoring off your invoices. If worse comes to worse or if there is god reason to fear a delay in the payment from a customers or even a delinquent one, you may want to take on a nonrecourse factoring arrangements says freelance accountants. They not only help reduce bad debts but they too hasten up collections.
It is very important for entrepreneurs to be in the know when it comes to the financial aspect of their business. This is true even if you are not primarily responsible for your books and have professionals hired to take care of accounting. As owner, knowledge is crucial to ensuring that you understand the date being held and that you will not be confused about it, have it misinterpreted or worse have any employee take advantage with fraud. So what are the basics then? The best accountants Watford have rounded up the following for us.
ACCOUNTING PERIOD – This refers to the period or span of time with which the books are prepared. It runs for a length of twelve months and can be further divided into two types. The annual period is one which begins on any date as long as it completes the twelve month cycle. The fiscal year on the other hand starts on January 1st and ends on the 31st of December. There is no rule as to which period must be taken. Companies are given the liberty to choose among the two.
CONSERVATISM – Otherwise known as prudence, it is a policy that anticipates losses but not gains or in other words it requires companies to err on the side of understating assets and income and overstating losses instead of the other way around. This is done in the guise of uncertainty or doubt.
GOING CONCERN – This assumptions states that an entity provides will continue doing business for the foreseeable future long enough to carry out its mission, vision, goals, commitments and liabilities without any plan of liquidation. This is based on the fact that no company aims to invest with the end goal of losing and closing down.
MATERIALITY – An amount is material only if its addition or omission causes enough variance to significantly change a judgment or decision.
ACCRUAL METHOD – This principle necessitates that revenue is recognized when earned and expenses recorded when incurred regardless of whether or not actual cash has been received. Most companies follow this standard as it better reflects the entity’s financial position.
CASH METHOD – Quite the opposite, this recognizes revenues and expenses only when physical cash has been released or received. Although still present, the cash method is very seldom used today.
COST PRINCIPLE – This mandates that all assets and liabilities are to be recorded in the books with an amount equivalent to their acquisition costs and not their current market value.
Be sure to remember the above principles given by the friendly team of the best accountants Watford. Check out www.charterwells.co.uk.