When Should Accounting write-off B2B Accounts Receivable?

Posted by Ryan Howard on Jul 3, 2017 12:25:14 PM

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Sometimes your business accounting department has to make the choice between chasing down a client to pay an invoice or simply writing the whole thing off. Making the choice to write off receivables can be tricky. Not only can you not predict the future behavior of your client, you also must be aware of accounting methods, best practices and reasons for writing off receivables.  

When it comes to deciding to write off B2B receivables, here are some things to consider.

When to write-off B2B Accounts Receivable

Calculating Days Sales Outstanding

When considering writing off receivables, the decision should be based around timing. The longer the debt is unpaid, accounts receivables increases and therefore so does the DSO (days sales outstanding). The DSO measures the amount of days that it takes for a business to collect revenue after a sale. DSO is calculated by dividing accounts receivables by the total amount of credit sales during that same period and then multiplying by the number of days in that period. Some businesses may calculate DSO on a monthly, quarterly or yearly basis. 

A higher DSO means that the company is losing money by not converting credit to cash or capital quick enough. Cash flow problems could lead to a larger set of problems for the company's ability to pay vendors, employees or reinvest in the company. The size of the company will also dictate a high or low DSO but overall, an accounting department should calculate this number to determine if the business is maintaining good relationships with its clients or if some clients are not credit-worthy.


Get Paid Faster. Use These Reminder Notices.



What To Do with Problem Accounts

Unfortunately, some clients may reveal themselves to be problem accounts over time. The client may have signed a contract in good faith, there may be situations or other red flags that arise that prevent or delay payment:

  • Company downsizing, merger or acquisition
  • Problems with fulfilling the contract or your sales team negotiated terms that were not communicated
  •  Inconsistent communications or payments
  • Non-responsive, combative or avoidant accounts payable department

As frustrating as it is to attempt to track down payments, communicating through friendly reminders or hiring a collections agency to clean up accounts receivables can be an option before writing off the account altogether. 



Settle or Write Off Bad Debts

If your business uses an accrual method accounting system, an ideal situation would be to clean the past due account from the books before year-end so that tax time is less complicated. This may mean settling for less than what is owed on the account or using IRS-acceptable accounting methods for writing off bad or uncollectable debts.  

The IRS will allow businesses to write off bad debts if:

  • There is proof of an obligation to pay you, i.e. a signed agreement or contract
  • You are counting the debt as part of your gross income (accrual method)
  • The debt is related to your business, for instance for a product or service you're providing
  • The debt is proven worthless, or partially uncollectable, to collect and you can provide proof of unsuccessful attempts to collect
Bad Debt is Costly

If a client is unable to fulfill its obligation to pay and your business is unable to collect, the total cost may be more than the value of the account. Over time, days sales outstanding and challenges to cash flow may begin to reveal the true cost of uncollectable debts. To reduce the chances of writing off unpaid accounts, follow these general best practices:

  • Establish consistent communication with your client's accounts payable department
  • Schedule regular intervals to follow up on invoices and contact quickly when past due
  • Offer incentives to pay early or on time
  • Hire a collections agency to collect
Wondering how business collections works? Learn more or contact us directly to ask questions.


Topics: Best Practices, Accounts Receivable