Good credit has a significant role when it comes to effective functioning. It's more about focusing on the long-term financial health of your business enterprise. Besides, credit sales form a significant chunk of a company's total turnover compared to cash sales. Automotive companies, through credit facilities, help buyers purchase high quantities, thereby helping achieve economies of scale.
If your business cannot collect these outstanding amounts, it's best to partner with an automotive collection agency. Some of the reasons for default could be due to the debtor filing for bankruptcy or the inability to trace the debtor.
Once a debt gets classified as uncollectible, the third party debt collection agency records it on the debit side of the income statement. A second effect can be observed in the company's balance sheet when the assets are impaired and bad debts are written off.
When does debt go uncollectible?
The credit sale may vary from one automotive debt collection agency to another. The credit period may range between 30 days to 90 days, depending on the creditworthiness of the debtor and industry practices. A professional firm will keep a close eye on these receivables based on the outstanding number of days. If the debtor fails to pay, the third party debt collection agency classifies it as doubtful or worthless.
Comparing the uncollectible
In the United States, statutes of limitation govern the collection period when it comes to outstanding debts. But, the time frame varies from one jurisdiction to another. In the case of automotive bad debt, they are considered a loss incurred during operation for less than one year.
Ascertaining the uncollectible debts
The third party debt collection agency helps estimate bad debt expenses. A higher uncollectible estimate would raise questions on the effectiveness of the company's credit policy. Besides, a low estimate could inflate the debtor and accounts receivable amount in the balance sheet.
Automotive collection agency determines it in two ways. The first is through the percentage of accounts receivable method, and the other is by using a percentage of sales method. In the case of percentage, the third party debt collection agency sets aside a provision for doubtful debt as a percentage of the outstanding receivables balance.
When going through the sales principle, the automotive collection agency would calculate a provision for doubtful debt based on the sales during the period.
The write-off method
Write-off or charge-off is a way to remove uncollectible debts in the fiscal year altogether. The automotive companies have to debit the bad debts expense and credit the A/R to record the impact of worthless debt.
Besides, these debts are eligible for tax deduction only in the year in which they were deemed unworthy. However, in the case of a partial write-off, the entire amount may not get deducted unless there's a default for the whole debt.
Bad debt impacts
Your balance sheet is an accurate and fair indicator of the company's financial position on a given day at the end of the financial reporting period. The automotive collection agency helps adjust the balance sheet to reflect the impact due to poor debt.
It's essential to recognize bad and doubtful debts. This leads to an offsetting transaction in accounts receivables or debtors' balances, and the actual amount of uncollectible debts reduces these heads.
Final Wrap
Bad debt is a significant issue. You need to have a strategic approach when it comes to debt collection. It's essential to partner with a professional firm not to worry about accounts receivable management. Get in touch with the experts and meet all your requirements.