Money Management
FOR IMMEDIATE RELEASE: August 20, 2007
HOW TO
DEAL WITH BAD BUSINESS DEBTS
Companies thrive by building trusted business
relationships with their customers. Sometimes, however,
small business owners find that customers fall behind in
payments for goods or services they’ve already received.
There are a number of ways to deal with this problem,
according to the North Carolina Association of CPAs,
depending on each situation.
REVIEW
THE AGE OF YOUR RECEIVABLES
It is
easy to miss the trends in your customers’ payment
histories unless you review the age of your accounts
receivable at least once a month. Accounting software
programs can provide this information in an aging report
if the receivable was entered when the purchase was made
or the service provided to the customer. Monitoring the
age of your receivables will help in avoiding the number
of customers who eventually become an uncollectible
debt.
SPEAK
UP
In some cases, the customer may be ready and able to
pay, but your invoice has simply slipped to the bottom
of the stack. To maintain a healthy cash flow, it’s a
good idea to send out monthly statements detailing the
status of customers’ accounts to update them on what’s
owed. If an account remains outstanding, then it’s time
to contact client personnel and let them know you expect
payment.
CONSIDER LEGAL ACTION
If informal reminders don’t work, you may need to take
stronger action. First, send the client a demand letter
that documents the fact that your company has delivered
goods or services and billed for them, and that the
client is now in breach of contract. The letter should
say when payment is required before further action is
taken and what your next step will be—most likely to
begin legal proceedings against the client.
Depending on the sum involved, it may be possible to
pursue your case in a small claims court, which handles
suits involving lower dollar amounts. You can represent
yourself, which means you save attorney fees, and the
process is generally fairly speedy. The dollar amount
limits vary, so check with your local court to see if
your case qualifies.
If you are owed a substantial amount, you may have to
sue the customer in civil court. This will likely be an
expensive undertaking, but the size of the debt may
justify it. You will have to document the agreement
between you and the customer and that you held up your
end by delivering the promised goods or services.
One option for avoiding a court case is mediation. The
two sides present their cases to a mediator, who helps
them reach an agreement. If the outstanding debt is the
result of a dispute with a customer—over the original
agreement, say, or over the quality of the goods or
services delivered—mediation may be a good step to
consider.
ANOTHER OPTION: COLLECTION AGENCIES
If chasing small payments is becoming time consuming,
you may want to hire a debt collection agency. These
agencies take on responsibility for pursuing customers
with overdue accounts, even bringing legal action
against them, if necessary. They usually take a
percentage of the amounts they collect as payment for
their services. Before hiring an agency, be sure to
check their references to learn about their reputation,
their experience in your industry, their collection
methods and their success rate.
CONSULT YOUR CPA
If you cannot collect the money you are owed, you may be
able to deduct the amount on your income tax return.
Internal Revenue Service Publications 535, Business
Expense, and 550, Investment Income and Expenses,
explain the details. You may also want to report your
experience to your local chamber of commerce, the state
credit bureau or the Better Business Bureau so that
other businesses and lenders will know about your
problems with this customer.
Collecting overdue debts can be a frustrating experience
for small business owners. Your CPA can advise you on
how to work with clients who are in arrears and on how
to better manage outstanding debts.
Produced in cooperation with the AICPA
©2007 The American Institute of Certified Public
Accountants
