Provision for bad debts sensibly

When to run this

Run this play with a client whose balance sheet shows debtors that everyone quietly knows will never pay. Carrying those amounts at full value flatters the accounts and distorts decisions: the business looks owed money it will not see. Provisioning is the discipline of recognising, in the accounts, that some debts are doubtful, and writing off those that are genuinely uncollectable, so the books reflect what is realistically recoverable rather than the full face value of every invoice ever raised.

This is a natural year-end or review conversation, with the ageing report in hand, and it dovetails with recovery: a debt should be properly pursued before it is conceded as a write-off.

The play (steps)

Help the client apply judgement to the ledger — with the technical accounting and tax treatment confirmed by the proper adviser:

1. Read the ageing report critically. Identify the oldest and most doubtful balances rather than assuming every debtor will eventually pay.
2. Separate doubtful from dead. Distinguish accounts that are merely slow or contested from those that are genuinely uncollectable.
3. Pursue before conceding. Ensure a doubtful debt has been properly chased — and, where worthwhile, referred for recovery — before it is treated as a loss.
4. Provide realistically. Recognise doubtful debts so the accounts reflect likely recovery, not optimistic face value.
5. Confirm the treatment. Have the specific accounting and tax treatment of provisions and write-offs confirmed by the client's accountant.

What good looks like

A client provisioning sensibly has a debtor ledger that tells the truth: doubtful debts are recognised, dead ones are written off, and the remaining receivables represent money the business can realistically expect. Decisions made on those numbers — about credit, spending and growth — rest on reality rather than wishful thinking. Importantly, no debt is conceded as lost until it has been genuinely pursued, so provisioning reflects honest assessment rather than premature surrender of recoverable money.

Before writing a debt off, a client can take a free, no-obligation view of whether it is still worth pursuing via a free debt appraisal.

What to say to the client

Make honesty the theme: “Carrying debts you know won't be paid makes your accounts lie to you — you make decisions thinking you're owed money you'll never see. Provisioning just makes the books tell the truth. But don't write a debt off before you've actually tried to collect it; the point is realism, not giving up on money that's still recoverable.”

Be clear about scope: you are framing the discipline and the sequence. The precise accounting and tax treatment of provisions and write-offs is for the client's accountant, and what you provide is general information rather than tax advice.

Common mistakes

The first mistake is carrying obviously dead debts at full value, which flatters the accounts and misleads the business. The opposite mistake is writing debts off too early — conceding money that a proper recovery effort might still have collected. The third is treating provisioning as a purely accounting exercise divorced from the recovery question, when the two belong together: assess, pursue, then provide or write off. Get the technical treatment confirmed by the accountant.