How to Instantly Improve Your Accounts Receivable
If you’re looking to improve your accounts receivable, it is important that you look at every aspect. One aspect you may be overlooking as a small business owner is your bad debt reserve. The more you know about your bad debt reserve, the more you know how to improve your accounts receivable.
What Is a Bad Debt Reserve?
A bad debt reserve is defined as an account set-up by your company that will be used to offset losses from bad debt. The bad debt can be from delinquent accounts or from loans that you’ve taken out on behalf of your company.
To Improve Your Accounts Receivable, Calculate Your Bad Debt Reserve
In order to calculate the bad debt reserve, there are some steps that you must take. Having the right calculation for your bad debt reserve will help you make better decisions related to which bad debts you should write off and which ones you should pursue through collections.
First, you should set-up a general reserve of funds based on the sales from the previous year. There’s no perfect way for you to determine the amount of r a general reserve, but you may consider having at least enough money on the general reserve to cover six months of business operation expenses.
Next, you should have a reserve for high risk accounts. This reserve is used to cover bad debts that are likely to go into bankruptcy or that may be placed for collection in the future. You can also have a reserve for cover accounts that are simply slow paying. They may not be bad debts, but they could become bad debts.
So just how should you fund your bad debt reserve to improve your accounts receivable? The answer depends on your company’s history of the number of bad debts. You must come up with your bad debt allowance (BDA). This is an estimate of future bad debts that you will need to write off instead of just writing off bad debts when it happens.
Review your bad debts from last year. This is one way that you can come up with your BDA so that you can create your bad debt reserve. You could also add in an additional allowance if you notice that you have more bad debt at certain times of the year. Make sure that you review your BDA each year in order to set-up your bad debt reserve properly for the new year. This will help you improve your accounts receivable and your cash flow.
Get Help With Your Bad Debts
If you have bad debts that you’d like to collect on or if you’d like a professional evaluation of your credit management practices, call Clients ARM. We have more than 30 years of director-level experience in accounts receivable management and in credit management services. Clients ARM offers a free, no obligation review of your credit management practices and your accounts receivable needs. Clients ARM can also help with your collections needs. We are licensed in several states and provide both first and third party collections.