Bad debt: when to write off a customer

Every aging report has them: invoices from eight, ten, fourteen months ago that everyone privately knows will never be paid. They stay on the books because removing them feels like giving up, and because the write- off lands as a hit to this month's profit.

Both instincts are wrong. Keeping a dead receivable does not preserve any chance of collecting it, and the loss you are avoiding recognising already happened — back when you booked revenue for work that was never going to be paid for.

What a stale receivable is costing you

It overstates your assets, so your balance sheet claims you own money you do not. It inflates your A/R, which distorts DSO and makes your collections look worse than they are on the accounts that matter. And it quietly poisons your forecast, because a 13-week cash flow built off open receivables will keep expecting cash that is not coming.

Deciding when it is dead

There is no universal age. What matters is whether anything has changed and whether anyone is still actually pursuing it. A practical test:

• Has the customer acknowledged the debt recently? A dispute you are working through is alive. Silence across several attempts is not.
• Are they still trading? A closed business or one in insolvency proceedings is usually the end of it, whatever the paperwork says.
• Is the amount worth the pursuit? Below a few thousand dollars, formal collection or legal action rarely returns more than it costs.
• Has anyone contacted them this quarter? If not, it is not really being collected — it is being stored.

Set an age threshold as a trigger for the review rather than for the write-off itself. Something over 120 days past terms gets a decision; that decision may well be to keep pursuing it.

What the write-off does

Mechanically it removes the receivable and records a bad debt expense. Your assets fall, your profit falls by the same amount, and no cash moves — because no cash was ever going to move.

Writing it off does not forfeit your right to collect. If the customer pays two years later, you simply record the recovery then. Nothing about the accounting entry changes what you are owed legally; it just stops your books from claiming an asset you do not have.

Then look at where they came from

A write-off is worth something beyond a cleaner balance sheet, but only if you ask what the dead invoices had in common. They usually rhyme: the same sales channel, jobs above a certain size taken without a deposit, a particular industry, or customers onboarded during a rush.

That pattern is the actual return on the exercise. Bad debt is rarely random, and the controls that would have prevented it — a deposit, a credit check, a lower limit for new accounts, stopping work at a threshold — are cheap once you know which ones you needed.