Unpaid invoices? Here is how to handle bad debts properly
Chasing people for money is easily one of the worst parts of running a business, but letting unpaid invoices just sit there as we head into June makes things a lot harder than they need to be. Getting cash out of your overdue accounts and into your bank account needs to be a priority right now, especially since this time of year always brings a cash flow squeeze.
A simple, structured approach is the best way to clear the backlog. Start by looking at your accounts receivable to see exactly who owes you and how late they actually are. For clients who are only a couple of days overdue, a quick, friendly email reminder or a phone call is usually enough to get things moving. If someone is genuinely struggling to pay, it is often better to set up a payment plan to get the money in instalments rather than leaving the invoice completely up in the air.
But there are always those few invoices where it becomes pretty obvious you are never going to see the money, and this is where a lot of small business owners get stuck when it comes to writing off bad debts. There is a common misconception that you can just wipe out any unpaid invoice to get a quick tax deduction, but the rules are actually quite specific.
For starters, you can only claim a bad debt deduction if your business uses accrual accounting. That just means you have already officially reported that invoice as income in a previous BAS or tax return. If you report on a cash basis, you cannot claim a deduction because you never actually declared that money as income in the first place. On top of that, the debt has to be genuinely unrecoverable, meaning you have to show you actually tried to chase it up, and the final write off has to be formally processed in your software before 30 June.
If you want to clear out the junk before the financial year ends, now is the time to identify those impossible accounts so your books actually match reality.
If your ledger is looking messy or you want a hand making sure your bad debts are processed correctly before the deadline, get in touch with us today and we can sort it out.
This information is intended to be general in nature and is not personal financial advice. It does not take into account your objectives, financial situation or needs. Before acting on any information, you should consider the appropriateness of the information provided in relation to your own circumstances.
