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You’ve probably heard it before: You’re not in the tool business, you’re in the collections business. But that doesn’t mean you need to be in the collection agency business.
It can be a huge waste of your time and energy chasing skips and no pays. That energy is best used making more sales than on stewing over the guy you feel cheated you.
“If someone skips, Matco helps me try to collect,” says Perrin. “I also use a collection agency.”
“Anyone can add your skip in our database for free,” says Anderson. To check the skip database, SkipCheck.com offers month-by-month and annual subscriptions. “We’ve had a skip from one coast picked up by a dealer on the other coast. At first, I didn’t believe it -- but I checked it out and it was true.”
Reporting your skips may be time consuming, but it can be worth it. Sometimes it can help you catch what Anderson calls the “Bad Guys” while also helping other dealers avoid getting stung.
Most dealers avoid hiring a lawyer or going to small claims court because it can cost a lot of money and take you away from your truck with no guarantee of collecting a nickel. A good collection agency, on the other hand, will not charge you a penny unless they collect from your customer, and their fee is based on a percentage of what they collect.
But you need to turn over your skips quickly, the longer you wait to give the account to your collection agency, the less likely you are to collect it.
Trying to be your own collection agent can also get you into hot water. Rules vary from state-to-state, but you could end up getting cited for harassment. Collection agents know the local laws and also know the techniques that work best to get you your money.
End of the line
When you’ve done all you can to collect from a skip and you’ve hit a wall, it’s time to write it off. Don’t fume over a skip and let it eat you up. Walk away and focus on peddling more tools.
“There are two ways to write off bad debt,” says Gregory Fydryck, a CPA in Schiller Park, Illinois. “One method is called a ‘direct write-off’ the other is a ‘provision for bad debt’.”
Both methods are used for the accrual accounting. And, as per IRS requirements, any business that carries an inventory, like a tool truck, must use the accrual accounting.
Using ‘direct write off,’ you deduct the debt invoice by invoice. Where with a “provision for bad debt’ you begin your fiscal year with a predetermined percentage based on your historical averages, then the bad debt account is adjusted at end-of-year to mirror the actual bad debt. There are no major tax advantages to one method over the other. But the second method is more sophisticated and usually more commonly used by larger corporations, says Fydryck.
It’s frustrating. It’s time consuming. But it’s a fact of the business. Skips will happen. Don’t waste time trying to eliminate them or chasing them. Instead be sure you cover your bases upfront and then concentrate your energy on making more sales.
Remember, in the end most of your customers will do the right thing and pay you what they owe you. That’s what makes it all worth it.
A distributor shares his collection techniques.