Revenues and profits are the lifeline of any business enterprise. Completing the business cycle to the stage of actually receiving the money is necessary.
This is bound to lead to problems for the business. In fact, the inability to receive payments may cause the business organization itself to have troubles meeting its own expenses. This may lead to bad debt which can snowball into a major liability for the company. The risk of bad credit or pad payments is ubiquitous. In fact when the situation gets really aggravated, some people even say that the system of credit is responsible for plunging our society into deeper debts. But that is probably going too far.
The credit payment system came into existence because at times it would be difficult to make large payments. The system of paying by credit allowed the dealer to continue doing business with customers who he had a long standing relationship with and who were finding it difficult to make payments.
Many businesses would lend a loan on a good faith basis. However, as we all know, this does not always happen. People do suffer from financial crises at times. This makes it difficult for them to pay their bills and debts. Sometimes the payment may never materialize, and the person who is to receive the payment finds himself stuck with bad debt. Yet, even though the payment will never appear, the customer will have received the benefits of the purchase he had made.
Companies do plan ahead of time and make provisions for any such bad debts but these do bring down their net profit. Moreover, it does not reflect well in their accounts. Many individuals also are generous enough to loan money to their friends or others. Despite waiting and despite reminders and despite best effort if this money is still not recoverable, it is called bad debt. This must be written off from your book of accounts.
Bad debt is a loss and an embarrassment. It sometimes leads to all their hard work going unnoticed. It is sad but true that sometimes only these lost payments manage to catch everyone’s attention. Only some types of bad debts can be deducted from tax whereas others are not exempted from it.
The only way in which a company can cut down on such expenses is by employing the services of a collection agent who can go from debtor to debtor to collect the pending payments. You might try it but do not be too hopeful of success. The person could skip tracing.
In order to protect one from heavy losses, the seller or dealer should always get an undersigning from the customer stating that he will make the payment within a stipulated period of time. Alternatively, the dealer could collect a retainer fee for the services are being offered to the purchaser. Even if the due date is already in the past, there might be a way out. Probably paying according to a payment plan could avoid the loan going bad. According to the plan give the borrower the opportunity to make small though fixed payments.