Reports CFOs and Managers Can Use to Beat Bad Debt

Bad debtIn every puzzle, there seems to be a missing piece.  Yet, when the picture is nearly complete, it is easier for the mind to imagine what should go in the blank space. Loss is a fact of life, the sooner gotten over and moved on from, the better. Every good strategist, from the poker player to the shrewdest CFO, knows when to say “good grief” and cut his or her losses.  It is an unavoidable pitfall, falling short of perfection.  Having the crystal ball to get out ahead of losses and factor them into future projections is where the magic lies.  The art and science of numbers has been crafted, with analytical software that can take advantage of the drift from the ideal bottom line.  In this blog, we’ll cover reports and processes CFOs and Account Managers use to beat expected bad debt.

General Ledger Accounts:

General ledger accounts that are commonly forgotten are aging accounts; aka Allowance for Doubtful Accounts, Bad Debt Accrual, and Bad Debts Expense.  The projected estimates for these accounts could come from industry averages, past history, trends, or just pulled out of the air.  Companies use myriad reasons and numbers to support these projected estimates.  At the same time, they also make plans to decrease uncollected accounts receivable in the future.

Aging Method:

Another process to estimate uncollected accounts receivable is by using the aging method. The aging method takes the projected sales by month and decreases revenue by the percentage of uncollectable sales.  A company may use an aging schedule like the one below or one that is specific to the company’s industry.  This method allows the company to see the percentage and dollar amount of revenue that they will not receive based on the number of invoice past due days. The graph below shows the number of months the invoice is overdue, the amount due, the percentage estimated to be uncollected, and the projected uncollectable amount.  This is not a fun process and often avoided like the plague.

Aging Method Summary

Months Outstanding

Amount % estimated  to be uncollected

Uncollectable Amount

3 months $10,000 26% $2,600
6 months $20,000 70% $14,000
9 months $15,000 90% $13,500

Year-end balance of allowance for doubtful accounts

$30,100

*Percentage estimated to be uncollected according to The Accounting Minute by Sutherland.

Beat Bad Debt:

Both finance and sales departments need estimated bad debt information and should understand how the estimated bad debt was projected.  Now comes the fun part: Trying to beat the estimate and collecting more revenue for your company, thus making yourself look and feel great.  The sales department wants to put practices in place to encourage collecting on invoices. The sales team should make sure they know their customers’ budgets and payment cycles.  This way the sales person is not suggesting a product that is out of their budget, like the most luxurious car on the lot to a college student. Suggesting products within customers’ affordable budgets decrease the likelihood of the company not receiving payment. It is important for the salespeople to reach their goals, but it is crucial for the company to receive the most amount of money for sales, if not all of the sales.

Confidence is knowing you can.  Knowing exactly what you can expect to collect is genius.  Companies blindly driving their sales force to pump out numbers that please a person, a position, or merely a spreadsheet have been proven to be detrimental.  Not knowing where you are going and filling the front end of the coffers with junk sales is not wise, nor profitable long term.  A prudent company will educate itself on all available tools, and use those resources to the fullest extent. Accounts receivable management software with numbers your team can understand is the bread and butter.  Empower your sales and collections departments with the knowledge of how they can work smarter, not harder, together to beat expected bad debt.

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