Consider these facts before writing off a business bad debt this end of financial year
OMG it’s EOFY!
There’s no doubt that we live in interesting times. WFH, ISO, COVID-19, WTF and a host of other acronyms are now words of common usage. Here’s another one that you may not yet heard – OMGEOFY. The new financial year is not a time for regrets, (you’ve probably had a few) when it comes to business bad debts.
Let’s see if we can map a course through unchartered waters to avoid any second wave bad debt issues.
Bad debts always pop up towards the end of the financial year, when you have to decide whether you should “take the hit” and write-off that bad debt and (subject to complying with ATO requirements) claim a deduction OR keep chasing the debtor.
You can do both of course, but often once the debt is off the books and not front of mind, you will be tempted to just give up the chase and just get on with business. We all know how busy things get at this time; reports at 20 paces is just the start.
Many clients decide to take the hit because the collection has become a bit difficult, the debtor raises irrelevant issues which cause delay or because there is a fear of ever-increasing costs with no guarantee of recovery (especially if the debtor ends up insolvent, which these days can take months).
All of those reasons are valid, however, decisions are often made in the heat of the moment and without careful consideration of all of the facts. Keep reading to check yourself before you wreck yourself with these five facts about bad debts.
Note… these facts should be kept 1.5 metres apart!
Fact #1: Writing off a bad debt always costs you money
Yes, you get a deduction, but the dollar value of that deduction is not the full dollar value and only a percentage, depending upon your tax bracket.
Think about whether it’s really worth it before writing off that debt.
Fact #2: When you write off a business bad debt, the write off amount comes straight off the bottom line
Even worse, often people don’t even consider what they need to generate in revenue to get back to that pre-write off position.
Here’s a quick example. Your margin is 10% – i.e., for every dollar you generate in revenue, you can expect to net 10% profit. If you write off $10,000.00, you will need to generate $100,000.00 in revenue just to get back to where you were before the write off.
If we said to you we wanted to purchase $100,000.00 of your widgets you would be on our doorstep immediately. We have seen businesses write off that amount and not blink, not realising what they need to do to get back to where they started.
Fact #3: A bad debt is avoidable
You do not have to go through the stress of not getting paid. If you are well set up with proper documentation, a proper policy and process, you can mitigate your risk. It’s easy to become complacent because your bad debts are minimal and you’ve always done things a certain way with no problems.
The need for change seems unnecessary – why fix something that is not broken? Every business will experience bad debts at some stage, so it’s important to be prepared.
It is only when the inevitable day arrives that the penny drops. “If only…”, “Why didn’t I…”, “Surely not..” are the cries we hear when that bad debt finally comes home to roost.
Bad debts can send you broke. Never let an account become life threatening to your business. Be proactive with credit risk management tools such as business credit monitoring and company credit scores.
Fact #4: Sometimes, a business bad debt can send you broke
Inevitably, you need to give your customers a reality check and ask them, “Are you going to pay?” If not, why not? If so, when?
Fact #5: If your business isn’t performing well, take action.
We see many businesses that struggle and it isn’t a good place to be. Morale is down, there is never enough money to pay anyone when they should and there are angry suppliers making constant demands on money.
Cash flow can just dry up. Man/woman up and do something. Seek independent professional advice on how to overcome your debts, plan realistically for the future and escape insolvency.
Business bad debts are avoidable. This is your money we are talking about: real cold hard cash and your reward for the risks you take in business.
There is no need to throw it away. Take control today and avoid real pain later. If not you, then who? If not now, then when?
Want some tried and tested steps to bad debt success? Contact Terry Ledlin, Special Counsel at Ledlin Lawyers.
Email: email@example.com or phone 02-8488-3388.
Ledlin Lawyers articles are intended as general information and commentary and should not be used or relied on in place of legal advice. Please seek formal advice on particular transactions, circumstances and matters related to any articles, blog posts or case studies posted on this website.