FINANCIAL MANAGEMENT - BAD DEBT
This is the 39th of a series of newsletters published on Business Management and Management Skills. Not all topics will apply to your business, but each section will be beneficial to establish company goals and objectives. By reading and studying these newsletter articles, youre taking the first step in achieving your goals.
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An organizations financial loss due to nonpayment of monies due it is referred to as bad debt. Bad debts are a direct result of the credit policy and management of credit terms by your company. The credit policy reflects the desire and ability of your company to assume the financial risk of loss associated with providing customers with the benefits of credit. While credit should be granted only after an evaluation of the credit worthiness of the applicant, no evaluation procedure will ever be totally accurate. Your company will likely have some bad debts.
Unfortunately, this is part of running a business, and the obvious goal is to keep bad debts as low as possible. If your gross profit is 20 percent, you need five times the amount of the bad debt in additional volume to offset the lost profit. By conducting proper credit checks on customers, and by managing collection and billing procedures, you can help keep bad debts down to a minimum. Credit, like other business functions, must be managed in a timely fashion.
Keeping track of the percentage of bad debt losses to sales income is necessary so that you can include this cost in future bids. This will help to improve the accuracy of your estimates of the true cost of doing business when preparing bids.
NOTE: For additional information, please refer to the section on Accounting (#38) and Billing/Invoicing (#41) in this series of articles on Financial Management.
Mike Holts Comment: I would like to extend a special thank you to L.W. Brittian, a Mechanical & Electrical Instructor in Lott, Texas, for reviewing and editing the various articles in these newsletters. His comments and suggestions have been invaluable in the preparation of my Business Management and Management Skills Workbook. This newsletter article was extracted from that workbook. Watch for our next newsletter, and as always, we invite your comments and feedback. Send us your real-life experiences. We value your opinions and participation. Please respond to Barbara@MikeHolt.com. And be sure to visit Mike Holts Website at http://www.mikeholt.com
Copyright © 2002 Mike Holt Enterprises,Inc.