When should you write off a bad debt?
Hi there, tradie, Jon here obviously. When should you write off a debt?
Never? Should you chase it to death? You owe the money after all, are you?
And that would be fair or is there a time when you should say to yourself ‘It's no longer worth chasing this money.
I write it off instead of continuing to try to collect’.
There are no rules in this. There's no book
that says once a debt is three months old or six months overdue, you should write it off or anything like that.
But what there is opportunity cost. Opportunity cost is the cost to you of the opportunity you miss out on by spending your time
and your money and your emotional energy chasing this debt
instead, opportunity you miss out on doing something else like growing your business.
So the answer then is stop chasing the debt and write it off if the cost to chase it is more than the win of getting the money
or debt paid.
So let's talk about those two things for a minute and I'll illustrate with a real life example from one of my clients.
Well I think what I'm going to say is the win of getting the debt paid is smaller than you think
and the cost of chasing it is a bit more than you think so beware.
Let's look at the cost of chasing a debt as with most things you can DIY or you can pay someone else to do it for you,
a debt collector, debt collecting agency if you like. If your DIY cost you time, time not spent on the positive part
of growing your business and if you outsource it of course it costs you less time, still some time and some money.
I can't make the decision for you either but understand these things.
Some collecting agencies will advertise that they will get their costs from the debtor
and that's true. But it's not necessarily always the case. If the person has no money how are they going to get
your money and the costs?
And there's a process for chasing money. It goes a bit like this.
It starts with checking the paper trail making sure and or the collector will help you make sure that you prove the debt is real
and accepted. And it's good to have your terms and conditions clear on your quote, isn't it
and it's good to have a quote accepted in writing, isn't it. And if you don't have these things, it's a lot harder
to prove that the day is real especially if the agreement is verbal
and if the debtor doesn't remember it the same way you remember it.
And then the next stage in the process, once you've proven to your own satisfaction that it's a provable debt if you like
then you can start demanding payment and threatening consequences if payment is not made by a certain deadline.
Then you have to carry out your threats, don't you? You have to refer to a lawyer or a debt collection agency
or the debt collecting agency has to refer to court and start court proceedings. You have to carry out the threats you make.
Sometimes this is enough, those threats are enough to make them pay which is obviously everybody's hope
but sometimes not. But once you start these processes, then you start to incur real costs - lawyers
and going to court incurs real costs and most collection agencies won't stump up their money
to try and recover your money especially if it's not certain that they're going to get their money back. Then we make a new,
stump it up and if they recover it back from the debtor at the completion of a successful case, then you get your money back.
They won't be risking their money for you.
So you're going to have to probably risk some money.
And this is important because now you're actually risking hard cash to try and get this debt back all this debt paid.
If your court case is successful, they'll recover their costs of course which is great and you get your money back.
If your court case isn't successful or if your debtor doesn't have any money or any assets,
the court can force them to sell or that person closes their business down if it's a business
and unfolds the business to avoid paying then you don't get any money and that's quite a common thing.
Or it becomes more and more expensive trying to chase them to make them pay up even if you're successful in court.
So you're risking money a thousand or so for the letters one or two thousand for court applications more
if you actually end up with a court hearing. You're paying for lawyers and they're worth five $600 an hour.
So if you do go to court, you start to get expensive so you risk a thousand then you risk another couple and then you risk
many thousands, ten thousand perhaps if you're going to go to court for a day.
So most debt collecting agencies will reasonably try to avoid this expensive process and they'll try to negotiate
a settlement with the debtor either a payment plan or payment of a reduced demand to close the whole thing off.
So every debt is different, every situation is different.
You're not going to spend thousand dollars to settle a $1,500 debt, are you
especially a debt that might then get settled for a thousand bucks, you get the idea. You're going to weigh them up,
you're going to weigh the time and missed opportunity and physical cost of a debt against
the satisfaction and the actual financial gain of getting the debt paid.
The satisfaction in terms of benefit to your business is minimal, is it not? It might be nice for you,
might feel right but it doesn't benefit your business much. So this is what people get stuck in, they get stuck in
just wanting the satisfaction of being right and getting wrong writer and they when they fail to weigh that up against the costs
to your business of spending all that time and all that energy and all that money sorting the situation out.
So if you have a debt, if you have a debt or some debts,
don't ignore them. That's the first thing to do, don't ignore them, don't let them get old. The fresher they are, the easier they are
to recover. Get onto them. I'm a fan of giving them to a collection agency of course.
I like outsourcing as you probably know but when they start telling you you have to spend money to go further, it's time
to consider whether or not you want to do
whether or not you want to proceed, where the chances like I've been saying of winning,
the costs to win and money and time those opportunity costs and the amount you're likely to get.
So here's my real life story. My clients, current clients have someone who owes them about $8,000.
They want to get the money. It feels fair, they're pissed off that he hasn't paid them and they're understandably aggreed
they're going to give it to a debt collector. So it feels at the moment when we first talked about it like bother free for them,
they refer to a debt collector, they get their money happy days, they can focus on their business.
But we spent 15 minutes discussing it in our coaching session. So there's already been a cost.
I then asked him if the guy has money and they didn't think he does so
they might not get their money anyway whatever the debt collector does, so no they're reconsidering.
There's a low chance of getting all the money. There's a chance
that the debt collector will persuade the guy to cough up some money or arrange a collection a payment plan
but a debt collecting agency will take 20% so if they agree to settle for six and the collection agency gets 20% of that
which is $1 200 or something, then we're already down to $4,600. We're talking less money than it felt like
just by a negotiated settlement and the fees of the agency
and then it cost them the time and the energy and the stress and the frustration
and the missed opportunity and the missed focus, moved from growing their business
to this negative chasing four and a half grand.
How much energy would it take to find and win another job with four and a half thousand of margin
perhaps less than the time and energy they're going to spend chasing this debt down.
So we've agreed, this is what we've agreed. They're referred to a collecting agency but in a couple of months when the agency
comes and says if the agency comes and has failed to collect it and starts wanting them
to spend money to go further, we'll write it off and move on.
So that's the line we drew in that particular situation. Now of course as a business coach
I'd rather he didn't get into this situation in the first place, wouldn't I?
I'd rather, you built your systems right. I'd rather, you had clear terms and conditions on your quotes.
I'd rather, you only ever did work if you had written acceptances of your quotes or any variations.
I'd rather, you collected your money
on time quickly as possible and I'd rather, you enforced your terms and conditions,
your business enforced your terms and conditions and stopped work if someone was late paying, stuff like that.
Set your boundaries and stick to them. So get your systems right up front and you have less of this
bad debt problem to deal with.
Now of course if you want to talk to me about building systems into your business including for managing debt
then book a 10-minute chat with me and we'll talk about business coaching and all the systems.
I'll help you build or come to the Tools Down workshop and I'll explain all those lovely systems
that I'll help you to build. See you later.