Tips For Setting Your Automatic Write-off Threshold

Editor’s note: The following article originally appeared in Credit Today, the leading publication for the credit professional, a CMA Partner. Click here for Special CMA Member $10 Trial!

Do you have an automatic write-off threshold for small balances left outstanding on your A/R?

Some companies can research every short payment that comes their way, but for many, it’s simply not practical to do that. To keep up, you must set a minimum threshold, under which you automatically write off everything.

The two key variables to consider when setting this limit are:

  1. The cost to you of researching a short payment, and
  2. The likelihood of receiving payment.

As to number 1, the cost is simple. It’s the manpower required, per deduction, to research. You’ll want to take a couple of weeks and come up with an overall average amount per deduction. Let’s say you come up with 15 minutes per deduction. Then multiply this by the hourly cost of the staff involved.

But your cost is only one part of the analysis in this situation. If you find that traditionally your customers are right 85 percent of the time when taking a deduction (which is the typical average), then you will collect only 15 cents out of every dollar deducted.

At what level does your research become profitable? Do the math. You might find it’s higher than you realized. But two words of caution:

  1. don’t let anyone in your customer base know that you do this, and
  2. periodically research balances lower than your threshold so you can spot abuses.

This article originally appeared in Credit Today, the leading publication for the credit professional.
Click here for Special CMA Member $10 Trial!