Most companies can not completely avoid bad debt expense on their P&L. However, there are several strategic steps management can take to reduce bad debt expense.
The following will cover the credit application process, ongoing monitoring of existing customers, and collection of delinquent accounts. Implementation of the strategies discussed in this article will help you reduce the chances of future bad debts and help you collect any delinquent accounts you may already have encountered.
The Credit Application
The first step to avoiding bad debt is to have a formal credit application document. It is equally important that all information on the form be entirely completed. In reviewing many firms’ bad debt accounts, frequently there was no formal application and if there was, the credit application was often incomplete, unsigned, filled in “after the fact,” or never checked prior to actually extending credit.
The application can be customized to your company’s particular needs or style but at a minimum should include the following:
Credit Application Data
*Company name, address, telephone, and contact person.
* Trade and banking references complete with account numbers, addresses, contacts,and phone numbers
* Tax information (federal ID #, sales tax #, use tax #, UST)
* Type of entity (C or S Corp., Partnership, Proprietorship)
* Owner/major stockholders’ names, addresses, and social security numbers
* Credit amount requested
* Agreement to your company’s credit terms and conditions.
* Signature and title of person making the application.
