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Navigating aged debts: The pros and cons of writing off bad debt

08/04/2024

With late payment ever-prevalent, the issue of aged debts continues to pose a common challenge for companies, often leading to the consideration of writing off these debts.

Here, we delve into the pros and cons of writing off aged debts, the options businesses have at this stage, as well as explore how bad debt relief can impact businesses:

Pros of writing off aged debts

Clear view

Writing off aged debts allows businesses to remove these outstanding amounts from their financial records, providing a clearer picture of the company’s true financial health. This is particularly important when preparing financial statements for compliance or reporting purposes.

Time and resource savings

Pursuing debts can be a resource-intensive process, particularly as they age. Typically, the older the debt, the more time-consuming it is to try to recover, whilst the likelihood of recovery decreases as the debt ages. Writing these older debts off can free up valuable time and resources that can be redirected towards more productive activities, such as keeping on top of current invoices, focusing on core business operations or nurturing new or existing customer relationships.

Cons of writing off aged debts

Loss of revenue

Obviously, writing off aged debts means accepting that the company will not receive payment for these outstanding invoices, resulting in a direct loss of revenue. This can have a negative impact on the business’s financial performance and profitability

Impact on cash flow

Unrecovered debts can significantly impact a company’s cash flow, particularly for businesses with limited financial resources. Writing off aged debts can further exacerbate cash flow challenges, potentially affecting the business’s ability to meet its financial obligations or invest in growth opportunities.

Potential damage to customer relationships

Failing to pursue aged debts may signal to customers that the business is lenient or indifferent towards late payments. This could undermine trust and credibility, leading to strained relationships with valuable clients and increasing levels of late payment going forward.

Bad debt relief

In the UK, businesses may be eligible to claim bad debt relief on debts that are considered irrecoverable. This relief allows them to reclaim the VAT previously accounted for on the unpaid invoices, providing some financial relief from the loss incurred.

This article explores whether your business could claim relief.

Key considerations

Debt recovery potential

Before deciding to write off aged debts, it is prudent to evaluate the likelihood of recovering these outstanding amounts. Factors such as the financial stability of the debtor and the feasibility of collection efforts should be considered, along with the potential eligibility for bad debt relief.

Balancing short-term losses with long-term gains

Whilst writing off aged debts may result in immediate losses, businesses should consider the long-term implications, including the potential benefits of bad debt relief and the impact on internal resources being better deployed which can offset some of the deficit

Are there other options?

Instead of writing off aged debts, businesses can explore alternative solutions for debt recovery, such as renegotiating payment terms or engaging a third-party debt collection agency. These efforts may increase the likelihood of recovering the debt while also preserving customer relationships, and demonstrating your business takes late payment seriously.

The best way to avoid bad debt is to have robust credit control strategy in place before, during and after the sale. Find out more in our article on four ways to avoid writing off bad debt.

In conclusion, UK businesses facing aged debts must carefully weigh the pros and cons of writing off these debts, considering the potential impact on revenue, cash flow and customer relationships. By assessing debt recovery potential and exploring alternative solutions, businesses can make informed decisions and ensure the impact of bad debts is minimised.

If you have a debt you would like support recovering, our team would be happy to help. Call 0800 9774848 or email collections@hiltonbaird.co.uk. Alternatively, get a no win, no fee debt recovery quote.

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