DEBT MITIGATION

MINIMIZE BAD DEBT EXPENSE

PROTECT YOUR BUSINESS AGAINST BAD DEBT

Cash flow is the lifeblood of any business so anything that reduces cash flow could jeopardize business success or even its survival. Any company that extends credit to its customers is at risk of slower or reduced cash flow if any of that credit turns into bad debt expense. Although some level of bad debt expense is often unavoidable, there are steps companies can take to minimize bad debt expense.

When a customer defaults on its bills or is in danger of doing so, the company extending credit to that customer faces a bad debt expense. Bad debt expense reflects the amount of accounts receivable that a company is unable to collect now and may not be able to collect in the future. Because this bad debt expense must be charged against the company's accounts receivable, bad debt expense reduces the amount of accounts receivable on the company’s income statement.

There are many examples of companies dealing with bad debt expense. One company changed its approach to bad debt management after two major clients defaulted on their bills, leaving the company facing tens of thousands of dollars in losses. To make matters worse, the company had also dedicated considerable staff time and resources trying to collect on those bad debts with no success. By purchasing credit insurance, the company not only protected itself against future losses from bad debt, but it also was able to leverage that protection as it pursued growth with new customers.

Unpaid invoices can seriously affect your business by slowing cash flow, reducing inventory turnover, harming credit ratings and even tarnishing your company’s reputation. The longer debts remain outstanding, the harder debt collection can be.

Late payments are an unavoidable fact of business life, using a proper bad debt collection strategy to ensure the prompt collection of unpaid invoices is an essential part of doing business. The key is to find resources to ease the inconvenience of managing and collecting late payments while also speeding up resolutions of these unpaid invoices.

DIRECT WRITE-OFF VS. ALLOWANCE

Typically, the allowance method of reporting bad debts expenses is preferred. However, it’s important to know the differences between these two methods and why the allowance method is generally looked to as a means to more accurately balance reports.

When a customer defaults on its bills or is in danger of doing so, the company extending credit to that customer faces a bad debt expense. Bad debt expense reflects the amount of accounts receivable that a company is unable to collect now and may not be able to collect in the future. Because this bad debt expense must be charged against the company's accounts receivable, bad debt expense reduces the amount of accounts receivable on the company’s income statement.

Direct Write-Off:

When reporting bad debts expenses, a company can use the direct write-off method or the allowance method. The direct write-off method reports the bad debt on an organization’s income statement when the non-paying customer’s account is actually written off, sometimes months after the credit transaction took place. Company accountants then create an entry debiting bad debts expense and crediting accounts receivable.

In general, accounting departments do not use the direct write-off method for bad debts expense, as the company’s balance sheet would be likely to report an amount greater than the actual collectable amount and the bad debts expense may be reported in the company’s income statement for the year after the sale. Instead, accountants typically apply the allowance method.

Allowance Method:

Using the allowance method, accountants record adjusting entries at the end of each period based on anticipated losses. At the end of each year, companies review their accounts receivable and estimate what they will not be able to collect. Accountants debit that amount from the company’s bad debts expense and credit it to a contra-asset account known as allowance for doubtful accounts.

When accountants ultimately write off an accounts receivable as uncollectible, they can then debit allowance for doubtful accounts and credit that amount to accounts receivable. Using this method allows the bad debts expense to be recorded closer to the actual transaction time and results in the company’s balance sheet reporting a realistic net amount of accounts receivable.

DIFERENCE BETWEEN TRADE CREDIT INSURANCE AND BAD DEBT PROTECTION

If bad debt protection does not fit a company’s needs, there are alternatives. The best alternative to bad debt protection is
trade credit insurance, which provides coverage for customer nonpayment in a wide range of circumstances.

The best trade credit insurance also provides credit data and intelligence designed to help companies improve their credit-related decision making and credit management. The goal is to prevent losses from bad debt. Since no company can avoid bad debt entirely, thetrade credit insurance policy
 is in place to cover any losses that occur even after the company and the insurer have taken steps to minimize losses.

While bad debt protection only covers “losses from customer insolvency,” trade credit insurance covers “protracted default,” which is when a solvent company is late with its payment or simply fails to pay at all.  A large, specialty trade credit insurance carrier can also tailor a policy to cover many other eventualities, including:

• Unpaid invoices as a result of natural disaster
• Unpaid invoices as a result of political risk; for example, when doing business in other countries
• Losses that occur as a result of problems before goods are shipped; for example, this could involve custom-produced goods that cannot be sold to another customer
• Losses occurring after shipment by a contracted third party
• Losses occurring when selling on consignment terms

BAD DEBT COLLECTION PROCESS

1. STEP 1: We start with careful research using a variety of public and proprietary data sources to acquire accurate phone numbers, email and physical addresses of the debtor and begin rapid outreach using all methods to ensure our request is clear, leveraging our name and reputation in the market.
2. STEP 2: Because the likelihood of collections falls the older the debt becomes, our outreach is vigorous in the first 45 days, during which our primary objective is to reach the debtor directly to request payment in full.
3.  STEP 3: Should payment in full be refused, our second option is to negotiate a short-term (under 12 month) payment plan, if authorized by you.
4. STEP 4: Should the debtor still refuse to pay, we proceed with the legal process to seek payment through the courts. We can provide a legal service from judgment to enforcement action. We’ll discuss this with you before any action is taken.

BENEFITS OF INNSGIMER FOR BAD DEBT COLLECTION

• Customer Relationships: Our primary aim is to secure full payment as quickly as possible while maintaining your customer relationships.
• Your Business is Our Business : Commercial collections require specialized knowledge and our unrivaled experience and expertise will be at your disposal.
• Our Resources: As part of the INNSGIMER Group, we have access to the very best available business knowledge.
  
• Proactive Collection: Upon receipt of your instructions to recover the debt, we enter those details into our extensive database then assign a dedicated collector to manage your file.
• Local Expertise: We work in every market and time zone, conducting negotiations in the local language and dealing with the intricacies of the local legal system.
• Our Strength: Our financial strength is the foundation of our long-term partnerships with clients.