Uncollectible accounts (bad debts) are generally an expected and unavoidable cos

Question

Uncollectible accounts (bad debts) are generally an expected and unavoidable cost of doing business.  Some are caused by fraud, others by bankruptcy, still others by death of the debtor. Management must choose between liberal credit policies, which increase both sales and bad debt expenses, and strict credit policies, which reduce sales and minimize bad debts.  Picture yourself in charge of a company's credit policies.  How liberal would you be?  What precautions would you take to protect against excessive loss?

Explanation / Answer

Bad debts. as the name suggests, is an unavoidable cost which has to be borne by a company on account of huge uncertainty whether or not the customer would pay back the dues on time. It is only when a credit history is observed of a customer, we can get an assessment of the credit worthiness of the customer. However, excessive strictness in extending credit may also impact the sales as customers also prefer attractive credit terms to adjust to manage their funds. Hence, it is imperative to have a flexible credit policy aiming at increasing sales but at the same point, overseeing the credit worthiness of the customer through various channels which may be described to protect against the possible loss :

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