Managing non-paying accounts
You have taken the measures: monitoring the credit ratings and reputation of your financial counterparties, setting up contractual netting agreements and ISDA agreements, revising the credit limits under certain market circumstances. Yet they do not rule out the possibility that your debtors would fail to meet their payment obligations.
When faced with such problem accounts, you have mainly two options:
1. Keep the accounts open on the books until they are collected, or they are proved to be uncollectible
2. Write off the accounts
The first option means continuing chasing the past due invoices, knowing that they inflate your trade accounts receivable and force days sales outstanding (DSO) up. The second option means putting an (impermanent) end to the ordeal of collection and keeping your accounts receivable clean.
With the majority of businesses deeming payment collections and handling recalcitrant debtors the most arduous tasks of credit management, it is no surprise that the second option is favoured. However, there are hidden catches that you might want to consider before deciding to write off every problem account.