How to estimate bad debt costs?

Due to today’s relatively high financing costs and the fact that Hong Kong’s economy has not fully recovered, we often notice that many client companies will have some long-term receivables. In recent chats with several clients, they all mentioned that in today’s economic environment, they would rather do less than take the risk of doing too much but not receiving payment (bad debt). There are enough bad debts in one order, how many orders have to be made to make up for it first! Anyways, this time I will talk about receivables with you.

In accounting terms, receivables are classified as current assets, and current assets, as the name implies, are relatively liquid assets. Generally speaking, the expected recovery period of receivables is within one year. Different industries have different credit terms (commonly known as multiple periods). For example, in the retail industry, it is usually within 30 days; in wholesale trade, it may be within 60 to 90 days; in engineering and design-related industries, the general payback period may even be as long as half a year or more.

Our accountants will give special consideration to some overdue accounts receivable and then verify the recovery status of these amounts. So you may be wondering, what does it have to do with your accountant that my company cannot receive money?

The reason is that if the amount cannot be collected, the amount will be classified as bad/bad debt according to accounting standards, especially for the amount of debt that is relatively large. So you may ask, just because the money is not collected does not mean that it will not be returned in the future, so our duty is to ask what actions the company took to recover the debt, such as legal proceedings, or, if there is collateral or a guarantor behind the amount, has the company exercised its right to recover the money?

I once encountered a situation where a client said that the other party refused to acknowledge the debt due to a commercial dispute, so it entered legal proceedings. As a result, a legal professional was required to issue a "letter of opinion" to confirm the feasibility of recovering the debt.

If there is no evidence or reasonable reason to believe that the debt can be successfully recovered, the amount will also be regarded as a loss to the company and reflected on the settlement account.

That's all for today. See you next time!