Let’s start by stating the obvious- bad debt expense is a cost of doing business. If you have zero bad debt expense, most likely you are not taking enough calculated risk and leaving sales opportunities on the table. Too much bad debt? Well, you are probably too busy updating your resume to be reading this.
When an account is written off to bad debt expense, and a post mortem is done to ascertain if steps could have been taken to minimize the exposure, the most common thread that occurs is that the credit information on hand is lacking. This can be not recognizing the payment trends of the customer with your company, outdated financials, or most importantly, not having updated mercantile credit reports.
Most ERP systems will capture year-over-year data as to the customer’s payment habits. Adverse swings can be monitored. Obtaining financials is always problematic, but should be pursued nonetheless. When it comes to having updated credit reports, ideally with an alert mechanism, the Credit Manager’s lament is often that budgets are tight and they needed to cut back on this. I would suggest that this is a foolhardy approach, as obtaining good information on the front end will pay significant dividends by minimizing bad debt expense.
If you need to drive the point home to the CFO, paint this scenario (and substitute your company’s net profit margin to drive the point home:
A business that reports net income after tax of 5% that experienced a bad debt loss of $100,000 would need to generate an additional $2 million in sales to offset that bad debt write off.
If this doesn’t open the purse strings to ensure that you receive timely credit information, then I would suggest dusting off the resume- you’re gonna need it.
