In our earlier article, we defined bad debt as the sum total of due receivables which are not collectible. It can’t get simpler than that. Most times, the stress, distraction and resources required to chase such debts can be so high that organisations consider it necessary to write them off.
However, this doesn’t mean that the debtor should declare a thanksgiving session and testimony time for freedom from such debts. It simply means that the creditor’s financial statement of the will indicate that the written off loans are compensated through some other way. This is needed to cleanse the balance sheet of the creditor.
Cleaning of the balance sheet means bad assets are replaced. This does not mean that the borrower is pardoned or got exempted from payment. His debt will remain and recovery measures against him will continue. So, if you are a debtor, when you hear that your debt has been written off, don’t rejoice yet.
Creditors may write off debts due to many reasons among which are:
- To support accounting accuracy objectives.
- To create tax savings for asset owners, which reduces tax liability by creating (non cash) expenses that result in lower reported income.
Beyond accounts department
In most organisations, when a bad debt occurs, the accounts department comes under the heat of the management. However, from our experience, prevention of bad debt is not the responsibility of the accounts department alone.
An organisation can be likened to an organism, made up of many parts, systems or units. For the entire organisation to work perfectly well, all the systems need to be at their best, otherwise, the entire organisation malfunctions. Avoiding bad debt is thus a team work.
In any organisation where bad debt is prevalent, the following systems/units should review their operations and make necessary adjustments:
- The human resources department;
- The sales department;
- The credit monitoring/ control unit and accounts department in general);
- The line managers; and
- The entire board of directors.
Let’s look at the roles of each of the above departments in causing bad debt.
The human resources department owes the organisation a duty to ensure that appropriate steps are taken to guarantee the integrity of every staff recruited into the organisation. These include putting some measures in place to mitigate the risk exposure of the organisation, should any recruited staff act otherwise.
However, in most organisations, the HR department only stops at conducting interviews and issuing engagement letter. Most times, they know nothing more about an employee than the information that he or she conservatively provides. We have handled cases in which the organisation where a staff worked for so many years didn’t know his actual name. This means that such a staff wasn’t known beyond his facial appearance. This is bad.
The sales department constitutes the marshals of the company that execute in the field. It is the responsibility of this department to ensure that the sales team receives the right orientation on the sales and credit policy of the organisation. It is also its responsibility to report any observed anomaly by any member of the sales team.
This is important because there are often cover-ups among members of the sales force, which non-members of this team may find difficult to discover. Any organisation where bad debt is prevalent as a result of the activities of sales reps should hold the immediate line managers of the sales reps responsible and they will match the sales reps to their pranks and the bad debts will be drastically reduced.
The credit monitoring/control unit and accounts department in general is responsible for the accounting records and should perform its duties as the position specifies. This includes raising the red flags and alerting the various units when any customer or sales rep is nearing the credit limits in his transactions.
This function also includes reporting to the top management any observed irregularity in the credit transactions of the sales team. But, most times, in a situation where the accounts department colludes with the sales team, there will always be cases where some staff will overstep the credit limits with the intention to make it good shortly. This eventually leads to the accumulation of bad debts. Because the accounting team has failed in its duties, they try to cover it up in a manner that the organisation may not discover the damage in a long while.
Most times, the management can only find out when the accounting officer has left the organisation. This is why periodic auditing of the organisation accounts is very important.
The line managers to the sales reps are a very important part of the organisation and should be made to understand this. Their direct contact and relationship with the sales force positions them as their direct instructors and the ones from whose mouth they take the last command before hitting the field. As such, the sales reps also relate with them more closely, building a relationship that fosters performance when such relationship is positive. They can also communicate their mistakes to their line managers and take corrections from them.
However, in most cases where bad debt occurs, the sales rep also connive with their line managers. When this is the case, the line manager will go to any length to cover up for them.
If you have suffered bad debt in your organisation, fixing it up for you is a function of understanding your process. We will be addressing some of the ways sales reps mismanage the funds of an organisation in the next edition.
The board of directors comprises the pacesetters and decision-makers of the organisation. They approve the credit limits and also appraise the performance of the credit control unit and the accounts department in general. They call anyone to order when necessary. As such, in any situation where bad debt is allowed to accumulate to an alarming level, it is either they are not doing their job or they are doing it the wrong way.
This is the system in an organisation that every other system falls back on to enforce a decision which has been difficult for them to enforce, and this includes relieving non-performing staff of their jobs, no matter how important they think they are to the organisation.
If all these systems in an organisation synergistically play their roles, bad debt will be curbed drastically, with the resultant increase in the organisation’s cash flow.
By Frederick Ezenwa Ibeako