Ten Red Flags for Bad Debt

October 6, 2011

Many businesses extend credit to customers, and there are inevitable collections problems and bad debt expense. In some industries and companies, extending more attractive credit terms helps increase sales. The goal of managing accounts receivable is not necessarily to minimize bad debt expense or to minimize the amount of outstanding accounts receivable. Rather, the goal is to optimize profits by managing the risks and rewards of extending credit to customers.

Unlike when selling to large public companies with publicly available financial statements, when you sell to small businesses you have very little knowledge of their customer's financial condition and creditworthiness. Many small businesses are bootstrapped and undercapitalized, and may never be able to pay off large debts owed to you. Keep an eye out for the following red flags, and train your employees to spot them as well. 

Look out for these ten red flags of problem accounts: 

A check bounces, even if the explanation seems plausible
The customer fails to answer the phone or respond to voicemail and email messages, or expresses unusual frustration or apathy during collection calls
The customer starts taking longer to pay bills
The customer requests extended payment terms, higher credit limits, or a payment plan
A delinquent customer places an unusually large order
1. An investor-backed company starts talking about delaying payments until the next round of funding closes
You start receiving partial payments or payments of recent smaller invoices while larger, older invoices remain unpaid 
If you are a services business, a customer starts drumming up unwarranted complaints about the quality of service and refuses to pay bills or delays paying them until future services are delivered
A client refuses to pay all outstanding bills until a dispute on one particular bill is resolved
The customer fails to meet an agreed upon payment schedule

In our experience, these often portend an upcoming bad debt writeoff. The sooner you can spot them and reduce credit exposure to those customers, the less money you will have to write off. 

In an upcoming SmartBrief, we will present ideas to more proactively manage your credit and collections process and reduce bad debt risk while increasing cash flow. If you would like to discuss your collections process and concerns and learn how SmartBooks can help, please contact co-founder Calvin Wilder at cwilder@smartbookscorp.com or 978.202.3064 begin_of_the_skype_highlighting            978.202.3064      end_of_the_skype_highlighting x700.