Resulting in Bad Debt!!! What is your credit policy?
An organization’s financial loss due to nonpayment of monies due is referred to as bad debt.
Bad debt is a direct result of the credit policy and management of credit terms by your company.
The way you establish your credit policy will reflect the willingness and ability of your company to assume the financial risk of loss associated with providing customers with the benefits of credit. Credit should be granted only after an evaluation of the credit worthiness of the applicant, including references.
However, no evaluation procedure will ever be totally accurate, and your company will likely always have some bad debts. Unfortunately, this is part of running a business.
The obvious goal is to keep bad debts as low as possible. If your gross profit is 20 percent, you need five times the amount of the bad debt in additional volume to offset the lost profit. By conducting proper credit checks on customers, and by managing collection and billing procedures, you can help keep bad debts down to a minimum. Credit, like other business functions, must be managed in a timely fashion.
Keeping track of the percentage of bad debt losses to sales income is necessary so that you can include this cost in future bids. This will help to improve the accuracy of your estimates of the true cost of doing business when preparing bids.