If you give terms to customers there will undoubtedly come a time when you will not get full payment for work that you performed, and no amount of court appearances or collection agencies will change that. It is simply the cost of doing business. And while it might be incredibly satisfying to unleash your inner Guido on the customer to help them feel your frustration, it is probably better (and certainly more legal) to just write off the amount owed and never do business with them again.
This article will show you how to do that by creating credit memos and flagging the customer as someone you never want to work with again. Before we get started, however, we will first need to create a special account, billing code and credit rating.
If you don't already have a bad debt account you will need to create one. If you are integrating with QuickBooks or Peachtree, add the account in that software then run the Integration Wizard (under the File menu) and add the account to ESC. If you are not using an accounting integration or ESC accounting, go to the Company pull down menu and select Enter Chart of Accounts. Create the account using the Other Expenses category.
Next, we need to create a billing code that we will use on the credit memos we will be creating. This can be accomplished by going to the Sales pull down menu and selecting Enter Billing Codes. Create a new billing code with the settings shown below. Be sure to use your bad debt account in the Income Account field.
The last piece of setup needed is to create a credit rating that we will assign to customers that we write off. This will ensure that we do not do work for them again by restricting anyone from creating a dispatch for them. Go to the Customer Info pull-down menu and select Enter Credit Ratings. Create a code similar to the one shown below and you're ready to get started.
Performing the Write Off
The first step in this procedure is to determine what needs to be written off. The best way to do this is to go to the Collection Manager under the Receivables pull-down menu. Set the Days Delinquent to 90 and click Search. This will display all the customers that are far past due and the amount they owe. Highlight the first customer you want to work with and click Next.
Here you will see all the invoices that make up the delinquent amount and your previous collection efforts. If you determine that it is extremely unlikely that you will be able get the customer to pay, change the customer's Credit Rating to Bad and click Update. Note the customer number and the amount they owe, then move on to the next customer until you have created a list of the customers you need to write off.
Exit the Collection Manager and head to the Invoice List. Click Add and then select Credit Memo. Create a credit memo for the first customer on the list. Set the tax code to EXEMPT and use the Bad Debt billing code you created to enter the amount you are writing off. Save and repeat this process with the rest of your list.
Once you are all done, Post to QuickBooks or Peachtree to update the customers' balances. Please note this step is unnecessary if you are using ESC Accounting.
Now if you recall any of these customers on the Qualification screen, you will see their credit rating is bad. This is highlighted in red and will prevent anyone from accidentally creating a dispatch for them in the future. You will also see the credit memo in the Invoices & Quotes section, as well as a note in the History section showing the write off.
This should help you to start the new year off with a much better idea of what you can reasonably hope to collect and ensure you don't work for the same troublesome customers ever again.
Written by Eric Rausin
Featured in November 2012 Newsletter