Managing Bad Debts with Better Collections Management


By

Pradeep Raj. S
MBA Student
AMC Engineering College
18th KM, Bannerghatta Kalkere, Bangalore-560083
 


"Even without success, creative persons find joy in a job well done. Learning for its own sake is rewarding".
                                                                                                       - Mihaly Csikszentmihalyi

ABSTRACT:

India with Increased business expansion and operations the debt collection has become a specialized problem.  The Institutional and legal arrangements in the country are still not effective to provide good results to the increasing problems of recovery of bad debts and managing the bad debts through a systematic procedure.  This article focuses on the needs of managing bad debts through better collections management and provides necessary valid solutions which are applicable practically in all business organization on majority basis to solve the Debt collection and recovery problem.

Lastly the benefits of Implementation of key ERP solution for managing financial supply chain to avoid bad debts problems and its solutions are used in this study.

Key words : Collections management, Bad debts, Receivables management, Finanacial supply chain etc.

INTRODUCTION:

Every company has an aim of improving its cash flow and reduce its bad debts expense when the firm sells its commodity and services on credit it does not receive cash immediately and to Increase the sales companies in India grant Credit for several reasons such as competition, buyer's requirements and status, company's relationship with dealers and common Industry practice, this task involves formulation of good credit policy and following appropriate "Account Receivables Management".  The recovery of that amount granted as credit becomes an important work for the company so the tools and techniques of collections management helps in improving the Cash flow position of the company and reduce the bad debts and Increase the financial soundness of the organization.

MEANING OF BAD DEBT

A bad debt is an amount that is written off by the business as a loss to the business and classified as an expense because the debt owed to the business is unable to be collected and all reasonable efforts have been exhausted to collect the amount owed.  This usually occurs, when the debtor has declared of bankruptcy or the cost of pursuing further action in an attempt to collect the debt exceeds the debt itself.

The Present scenario in India

I.  Collection business and unregulated scenario In India: The Institutional arrangement of collection business has its own inherent shortcomings due to unregulated and primitive nature of collection business in our country being unregulated the procedures are not standardized; still litigation is used as the last resort tool for recoveries.

II. Indian legal system and collection of debt

The Indian legal system has the remedies available under the law to collect the debt, if the debtor does not agree to pay under normal circumstances.  The creditor may file a suit for his recovery; debts based on written contracts could be recovered by followed fast track procedure.

If the debtor is a company, creditor/his lawyers may apply in the 'company court' for winding up of the company due to non-payment of substantial amount of debt.  Summary trial is another way the process may take time 1 to 2 years (Trust man & co, New Delhi).

III. Taxation

Section 36(I)(Vii) of the Income Tax Act, 1996 enables the Assessee to claim deduction on account of Bad debt while determining its profit and gains of the business or profession.  Pradip kedia [2004] in his research paper of "Bad Debt- An unresolved controversy" as given his statements like:-

1. An Assessing officer of Income Tax has the power to enquire into the genuiness of the claim for deduction of the bad debts proved, the Assessee has to prove the debt as bad while claiming the deduction under section 36(i)(Vii) of the Income Tax Act, 1996.

2. The Assessee who is an individual or company usually write off any debt which is bad to reduce his profit of the previous year merely on the basis of an entry in the books of accounts the Assessing officer still has no wide powers to enquire about the genuiness of the claim on legally sound basis.

SUGGESTIONS FOR MANAGING BAD DEBTS

1. Improve Cash flow:

Increase profit and reduce your bottom line with streamlined, customizable, and highly efficient Collections activities.

2. Reduce bad debts expense:

By centralizing your customer contact and collection functions, you can lower the collection expenses with automated customer tracking and follow-up.

3. Target overdue customers:

Target overdue customers effectively seek out for those customers who meet specific criteria for overdue payments, and   automatically send them collections, letters, email notices, statements, and invoices.

4. Increase Sales productivity:

Improve productivity by feeding collection contact notes and other customer details back to the sales        force.

5. Manage collections effectively:

Assign customers to credit managers, create "To Do Lists" and track all following up activities.

SAP Receivables Management and Collections Management Solutions

Efficient receivables management can be difficult to achieve without the proactive management of past due accounts, profits can remain elusire and account receivables employees are pressured to process more they can, As a result, there is unnecessary errors, receivables losses, and the soaring costs of in efficiency all of which you can easily avoid by implementing SAP collections management application.

Key benefits of SAP collections Management application:

1. Proactive Collection of outstanding receivables.

2. Faster processing through the automatic identification and prioritization of customer accounts.

3. Improved customer relationships through customer specific receivables management.

4. Reduced days sales outstanding

5. Improved cash flow

6. Increased efficiency due to automated work lists.

7. Mitigation of Credit risk and potential closes through tight integration with the SAP credit management application.

8. Follow up of invalid disputes through integration with the SAP Dispute Management application.
 

--> Article continued on next page, click here -->

Source: E-mail January 3, 2011

 

           

 

Occasional Papers Main Page