Bad debts are amounts owed by customers that cannot be recovered. They can be a crippling for a new business and can easily occur if a proper credit control system is not put in place early on.
A credit control system is the process a business has in place to collect money owed by its customers. We always recommend to clients that their credit control system should be a priority when starting out.
If your business keeps good books then creating a credit control system can be very straight forward. It can be as simple as setting aside a time to send out reminder emails/letters, or become as serious as passing the account to a debt recovery firm.
To reduce the likelihood of bad debts, some of our clients conduct credit checks on their customers before offering them credit. If you discover a customer with a poor credit record, and you want to take them on as a client, you can ask for a deposit up front or issue partial invoices they can pay as portions of the work are completed.
(In fact, this isn’t a bad practice for all your clients, not just the ones with poor credit.)
This snippet is thanks to www.freshbooks.com: https://www.freshbooks.com/blog/6-ways-to-avoid-cash-flow-problems-in-your-business, and is written by Lee Murphy