You have advised me that that you are concerned with bad losses. A superficial analysis of your accounts receivable indicated that a large portion were over 90 days past due. While you feel certain that these accounts will be collected eventually, the company has experienced problems in paying its bills.
The bad debt losses are a result of the past due accounts receivable and can only be rectified once the underlying problem with the collection of accounts receivable is resolved.
The difficulty in paying bills is a result of the cash flow shortage which can also be resolved by fixing the underlying problem; the collection of accounts receivable.
There are several possibilities as to the cause of the underlying problem, and only a thorough investigation of each possibility will determine the cause and lead to the best possible solution. It is also imperative to keep in mind your company's key success factors when determining the contributing factors to ensure that nothing is overlooked.
The following are possible contributing factors and methods that should be used to investigate them.
1. Credit Policy. If the credit policy is too lax or if steps are not being taken to check the credit worthiness of potential clients, the company could be extending credit to risky clients. This risky lending will obviously create potential collection problems and could lead to an increase in bad debts as a result. A review of the current credit policy and steps taken to evaluate the credit rating of clients will indicate whether improvements are needed in this area.
2. Sales. Incentives based on total billings or number of new accounts could push sales staff to sell to clients who may be less than credit worthy. The sales staff also needs to be aware of the production...