Your business only survives if your customers pay for your services. When you run a small business, you have many things vying for your attention, so you hope that customers simply pay their bills without incident. However, sooner or later, someone is likely to default. They might even think they can take advantage of you if you’re small and just starting out. What do you do then? Understand how to smoothly handle things when customers don’t pay on time so you can focus on the things that matter.
The Right Way and Wrong Way to Record Accounts Receivable
Recording debt in a ledger isn’t quite as easy as simply entering a minus sign. You have to remove that amount from the money you expect to receive and place it in separate ledger. While an eventual payment by the customer always comes as news, it means reversing the process on both columns, not just one. The wrong thing to do is to add that late payment into moneys received while forgetting to erase the bad debt. If you don’t do both, your books will be hard to balance and your taxes will be wrong.
While some business owners gladly deal with such record keeping, managing a number that represents something you never received can cause confusion. You can grow to a point where your accounting has more columns than you can manage. At that point, you might want to consider getting some outside help.
Is it Time for a Collection Agency?
A debt gone bad can absorb a lot of company time. It wears on personnel to repeatedly call and chase after that customer who won’t pay. It slows or stops forward flows toward actual income and profits. You need to give ample attention to your paying customers, of course. When you spend too much time pursuing a debt, it’s time to hand that resource-absorbing task off to someone else.
A collection agency could take that weight off your shoulders. They may well succeed where you and your team did not. They can call more persistently than you and even send reports to collection agencies. A debt collection agency takes care of the communication, the time and effort, and even the ethics. You, on the other hand, get back to work, doing what you should be doing.
Suing a Customer for Non-Payment
At some point, you may choose to sue for payment. Each state caps amounts, however, and you should know the cap in your state. Further, suing costs money. The debt you attempt to collect with a lawsuit should be worth the time and the money before you consider that route. Such suits can commence without a lawyer on your behalf. While that sounds cheaper, you might need a good understanding of your rights and courtroom procedures. Consider it carefully before moving forward with that option.
Take Advantage of Bad Debt on Your Taxes
While uncollected money is no perk, the IRS permits you to write it off on your taxes. That lost money should not count against you. If you don’t write it up as a loss, the IRS will look at it as a gain instead, counting it as income. You don’t want that. Understanding how to add it to your taxes properly can be a bit tricky, especially if that debt crosses a fiscal year-end cut off. Further, you have to undo what you’ve done in next year’s taxes if the customer pays up. That calls for precise and studious record keeping. Keeping clean ledgers is imperative.
What Happens if You Ignore Bad Debt
Business owners sometimes ignore bad debt either because it is a hassle to deal with or because they simply don’t understand how to track it. Both of those reasons are understandable. However, ignored bad debt is money that you not only lose but which you pay taxes on. Ignoring unpaid debt creates inaccuracies in accounting that might be hard to find. If something else goes wrong with the books, a balance will be difficult. When customers don’t pay up, you have to record it and record it properly.
Move Customers Who Don’t Pay off Your Plate
You run a business to create profits. Day to day business usually doesn’t involve non-paying customers. When it does, a wrench has been thrown into an otherwise smoothly operating machine. Outsource your collections. Keep the time expense off the payroll and use your employees as income earners. Get an outside team to handle your bookkeeping. Instead of learning a complete trade, which bookkeeping is, add a CPA to your team, either full- or part-time. With the recording, balancing, and reporting off your plate, you will find your undivided attention at the helm to create your company’s future.
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