You've got outstanding bills customers just aren't paying . . . how much effort should you make to get your money? It depends on the amount of the bill and the cost involved in collections. You need to recognize when you've reached the point of diminishing returns and it's time to write off the invoice as uncollectible.
Stan De Groot, national financial services manager for Wesco Distribution Inc., a Pittsburgh-based distributor of electrical and industrial supplies, suggests calculating what your in-house collection steps cost. Those steps include issuing past-due statements and making telephone calls or personal visits. Then consider your margins and what your actual losses will be if you write off the invoice.
With this information, you can set some general guidelines. For example, balances under a particular amount will get a certain number of letters and calls before they're written off. Balances at a higher level may merit stronger efforts, including outside collection activity.
A collection agency can help you determine what balances are too small to pursue vigorously. Agencies typically work on a percentage of what they collect, and they know how much collection efforts cost.
When you decide to declare an invoice uncollectible, you may be able to use that loss to reduce your taxes on other income. Check with your tax advisor first, though; the IRS and state revenue departments have guidelines that include some time limitations and require you to prove you made a good- faith effort to collect.