Determining the Provision for Bad Debts

If you own a business and you wish to make sure that this does not end up being a losing venture, you may have to make sure that steps are actually taken regarding those debts that some of your customers may have made. Debts are not uncommon when it comes to businesses. In fact, it is very possible that your more loyal customers are the ones who would actually be incurring debts for certain purchases that have not been paid in cash. This is not really a problem. If you want to maintain your hold on these customers of yours, offering products to be paid much later is a good move.

The problem actually arises when you fail to collect the payments for the debts. This would naturally become so much worse when such debts turn bad because of longer period of non-payment. At this point, you would have no other recourse but to try considering more effective steps that would really compel the debtor to pay up. However, if such steps still do not work, it may be better that you sell such debts to a debt collection company. In this manner, you get paid, at least for the principal. Worrying about the debt is no longer a burden on your part but of the debt collection agency.

As much as possible, you should never allow your company to suffer effects of bad debts from your customers. In order to take action before things could go worse, you do have to determine a provision for bad debts. A provision for bad debts is some sort of threshold for the number and value of debts of your company before you consider it to be at the losing end. Apparently, this requires some computations. The said computations are meant to get the percentage of the value of debts in relation to the actual income of the company from active and non-debt accounts. Through this computation, you should be able to see whether your business is suffering from the problem of bad customer debts or it is actually earning despite of these.

Before actually determining the provision for bad debts though, it is necessary that you also know which debts should already be considered as bad. To do this, you would have to set a particular timeframe for each debt to be paid. If a particular debt has not been paid within the timeframe set, you would have to declare it as bad. There are cases, however, when you may have to be lenient. This is true if the debtor actually shows signs that he or she is willing to pay.

After you have decided on which debts you should consider as bad, the next thing that you need to do is to determine the income of the company. With this information and the total amount of bad debts that your customers may have incurred, you may begin getting the percentage of the bad debts. This provision of bad debts should be your basis for conducting serious efforts at compelling your debtors to pay.