It is essential that we learn from our mistakes. Bad debt losses are a cost of doing business, and every sale on open account terms carries some risk of nonpayment. That said, when a bad debt loss occurs, you have two options: (1) Lament your losses or (2) Learn from them.
I believe that there is at least one lesson to be learned from each bad debt loss. An assessment about what went wrong can reveal any number of mistakes, but in my experience these mistakes generally fall into one of these categories:
- The credit file was out of date and you were extending credit based incorrect or out-of-date information
- The debtor was allowed to exceed the credit limit
- Orders continued to release in spite of the fact the customer was past due
- The collector’s efforts and follow up were in adequate
- No financial analysis was done, or the analysis was inadequate, or it was done incorrectly
- The problem account was not given to the credit department manager soon enough
- The delinquent account was not placed for collection quickly enough
There are different solutions for each of the problems noted above, but the central theme is that bad debts can be reduced if collectors are give more structure, clearer directions,
more specific instructions and written guidance for managing delinquent accounts or for any active account considered to be a high risk.
That’s my opinion. What’s yours?
Michael Dennis’ Covering Credit Commentary. Michael’s website is www.coveringcredit.com.
The opinions presented are those of the author. The opinions and recommendations do not necessarily reflect the views of CMA, or their Officers and Directors. Readers are encouraged to evaluate any suggestions or recommendations made, and accept and adopt only those concepts that make sense to them.