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Bad Debt Write-Off Thresholds and Policies

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Bad Debt Write-Off Thresholds and Policies: How to Protect Your Bottom Line

Struggling With Unpaid Invoices? Here’s What You Need to Know

You’ve sent reminders. You’ve followed up. You’ve even considered legal action. But some invoices just won’t get paid. Every business faces this challenge, yet many fail to implement an effective bad debt write-off policy, leaving money on the table and skewing financial reports.

Ignoring bad debt doesn’t make it disappear—it quietly erodes your profit margins, cash flow, and financial clarity. The good news? A structured write-off strategy can protect your business while keeping your books clean and compliant.

Key Takeaways

  • First: How to determine when a debt should be written off
  • Second: Steps to set up clear write-off thresholds and policies
  • Third: Proven strategies to minimize bad debts before they happen

By the end of this guide, you’ll have a battle-tested approach to handling bad debts efficiently—without second-guessing your decisions.

Altrust Services - The Intersection of Accounting and Medical Practice Management
Altrust Services – The Intersection of Accounting and Medical Practice Management

What Is a Bad Debt Write-Off, and Why Does It Matter?

A bad debt write-off happens when a company removes an unpaid invoice from its books because it is deemed uncollectible. While frustrating, it’s an essential part of financial management.

Without a proper write-off process:

  • Your books will show inflated revenues that don’t reflect reality.
  • You’ll waste time chasing debts that are never going to be paid.
  • You could violate tax regulations by improperly handling uncollectible accounts.

When Should a Business Write Off a Debt?

Every business should have clear criteria for when a debt qualifies as uncollectible. Common factors include:
✔ The debtor has declared bankruptcy—making recovery nearly impossible.
✔ Multiple collection attempts have failed—despite letters, calls, and legal efforts.
✔ The cost of collection exceeds the owed amount—meaning it’s no longer worth pursuing.

Pro Tip: Setting a consistent write-off threshold ensures small, unpaid balances don’t pile up unnoticed.

How to Set Bad Debt Write-Off Thresholds

What Is a Write-Off Threshold?

A write-off threshold is the dollar amount at which a business decides whether to pursue collection efforts or classify the debt as uncollectible.

Example:

  • If your threshold is $500, any debt below that amount is written off without further collection efforts.
  • Larger debts may be escalated to collections or legal action before being written off.

Factors to Consider When Setting Your Thresholds

  • Business Size & Cash Flow: Can you afford to pursue smaller debts, or does writing them off make financial sense?

  • Industry Standards: Some industries accept higher default rates and adjust thresholds accordingly.

  • Historical Data: Analyze past bad debts to determine what’s recoverable and what’s a lost cause.

Best Practices for Managing Thresholds

  • Review regularly: Update thresholds based on economic conditions and customer payment behaviors.

  • Ensure compliance: Follow GAAP (Generally Accepted Accounting Principles) or IFRS (International Financial Reporting Standards) for consistency.

  • Train your team: Make sure finance and collections teams understand when and how to apply the policy.

How to Write Off Bad Debt (Step-by-Step Guide)

Scenario: A customer owes you $2,000 for a service provided six months ago. Despite multiple follow-ups, they haven’t paid.

Step 1: Review the Account

  • Check previous invoices, payment history, and correspondence.
  • Confirm that collection efforts were properly documented.

Step 2: Determine If the Debt Meets Write-Off Criteria

  • Has the customer filed for bankruptcy?
  • Have they been unresponsive for months?
  • Is the amount too small to justify further action?

Step 3: Seek Internal Approval

  • Submit a request for write-off approval based on company policy.
  • Ensure finance and management sign off on the decision.

Step 4: Make the Journal Entry

When writing off bad debt, the accounting entry typically looks like this:

Debit: Bad Debt Expense (Expense Account)
Credit: Accounts Receivable (Asset Account)

This removes the uncollectible amount from your receivables and properly reflects the loss.

Step 5: Keep Documentation for Tax & Audit Purposes

  • Maintain written records of all collection attempts.
  • Keep a copy of the final decision to write off the debt.

Important: Even if you write off a debt, you can still attempt recovery later.

How to Reduce Bad Debts Before They Happen

1. Strengthen Your Credit Approval Process

  • Run credit checks on new customers.

  • Set clear payment terms upfront.

  • Use contracts to protect yourself.

2. Automate Invoicing & Payment Reminders

  • Use accounting software to send automatic reminders.

  • Offer early payment discounts to incentivize on-time payments.

3. Escalate Collections Before Write-Offs

After 30 days past due – Send friendly reminder emails.
After 60 days past due – Call the customer directly.
After 90+ days past due – Engage a collections agency or consider legal action.

Measuring the Impact of Your Bad Debt Policy

Key Metrics to Track

Bad Debt Ratio: (Total Write-Offs / Total Revenue) x 100
Days Sales Outstanding (DSO): Measures how long it takes customers to pay.
Collection Success Rate: Percentage of debts recovered before write-off.

Tool Recommendation: Use QuickBooks, Xero, or FreshBooks for automated bad debt tracking.

Common Mistakes to Avoid

Ignoring Small Balances – They add up over time!
Failing to Get Approval Before Writing Off Debt – Always follow internal procedures.
Not Keeping Proper Documentation – Essential for audits and tax filings.
Waiting Too Long to Take Action – The longer a debt remains unpaid, the less likely it is to be recovered.

Final Thoughts: Take Control of Your Bad Debts Today

Bad debt write-offs don’t have to be a mystery—or a financial drain. By setting clear thresholds, automating collections, and maintaining strong policies, you can protect your business from revenue leaks and focus on growth instead of chasing unpaid invoices.

Want to streamline your bad debt process?
Altrust Services provides expert guidance to help businesses implement effective write-off policies, reduce uncollectible debts, and stay financially resilient.

Take action today—contact us to optimize your bad debt management strategy!

Why AltruST is Your Ideal Offshoring Partner?

Looking to elevate your team with top-tier talent? Meet Altrust – your go-to offshoring ally for businesses of all sizes.   

At Altrust, we’re all about crafting teams that vibe with your culture and values. Our commitment to quality and professionalism makes us the perfect fit for businesses seeking offshoring excellence.   

With a proven track record, our seasoned professionals are here to guide you through the offshoring journey, ensuring a seamless and successful partnership.   

Partnering with Altrust means tapping into our expertise in cultural alignment, talent acquisition, and employee management. We’re not just a service; we’re your dedicated partner in building the perfect global team for your business – whether you’re a small startup or a big player in the market.   

To reach out to Altrust please contact us at buildmyteam@altrustservices.com. Let’s discuss how we can enhance your team with top-tier talent and explore the benefits of offshoring excellence together. Looking forward to connecting! 

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Boost Your Medical Practice with Expert Digital Marketing

Enhance your online presence with our comprehensive Medical Digital Marketing package, designed to attract more patients and maximize your ROI. Our services include:

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