The management of doubtful debts, including the write-off of debt, is an essential part of managing the risks of financial statement manipulation in companies. This policy contributes to improving cash flow management and reducing the risks of financial manipulation associated with uncollected debts. Below is a detailed explanation of how to build an effective policy for doubtful debts and debt write-off:

The policy for managing the Write-off of Debt and Doubtful Debts

1- Defining the Objective of the Debt Write-off Policy

• Maintaining liquidity: Ensuring the availability of the necessary liquidity for the company to operate effectively.

• Risk management: Reducing the risks associated with uncollected debts.

• Establishing criteria: Setting clear criteria to identify doubtful debts and the write-off of debt.

2- Identifying Doubtful Debts

• Criteria for determining doubtful debts:

  • Delay in payment: Setting a delay threshold after which debts are considered doubtful (e.g., 90 days).

  • Financial assessment of the debtor: Assessing the financial situation of customers to determine their ability to repay.

  • Historical record: Reviewing the debtor’s past payment history.

• Debt evaluation process:

  • Classification of debts: Categorizing debts into groups based on their collectibility (e.g., good, doubtful, written-off).

  • Periodic updates: Reviewing and classifying debts periodically to ensure updated assessments.

3- Establishing Provisions for Doubtful Debts

A. Provision estimation:

• Percentage of debts: Allocating a percentage of total doubtful debts as provisions (e.g., 10% of debts overdue for more than 90 days).

• Historical analysis: Using historical data to estimate an appropriate percentage.

B. Accounting entries:

• Setting up provisions: Recording provisions for doubtful debts in the accounting books.

• Journal entry:

  • Debit: Expense for doubtful debts

  • Credit: Provision for doubtful debts

4- Collection Procedures for Doubtful Debts

A. Internal collection:

• Direct contact: Contacting debtors to remind them of their dues and determine reasons for delay.

• Official notices: Sending formal letters outlining the due date and potential consequences for non-payment.

B. External collection:

• Collection agencies: Contracting specialized agencies to recover doubtful debts.

• Legal action: Resorting to legal procedures and filing complaints with relevant authorities in extreme cases.

5- Debt Write-off

A. Criteria:

• Inability to collect: Ensuring that all possible efforts to collect the debt have been exhausted.

• Time frame: When the debt exceeds a certain time period without being collected (e.g., more than 180 days).

B. Procedures:

• Internal approval: Obtaining senior management approval before proceeding with the write-off of debt.

• Accounting entry: Writing off the debt in the accounting records.

• Journal entry:

  • Debit: Provision for doubtful debts

  • Credit: Accounts receivable

C. Documentation:

• Record keeping: Maintaining all documents related to debt collection attempts and procedures for the write-off of debt.

• Review and audit: Ensuring all cases of debt write-off are reviewed and audited periodically.

6- Monitoring and Evaluating the Policy

A. Periodic reports:

• Financial reports: Preparing regular reports that show the status of doubtful debts and written-off debts.

• Financial analysis: Analyzing the impact of doubtful debts on the company’s financial health.

B. Periodic updates:

• Policy review: Regularly reviewing the policy to ensure its effectiveness and making adjustments as necessary.

• Procedure improvement: Enhancing procedures based on findings and recommendations from audits and reports.

7- Training and Awareness

• Staff training: Offering training programs for employees involved in managing doubtful debts and write-off of debt.

• Risk awareness: Educating staff on the importance of monitoring debt collection and avoiding financial risks.

8- Technology and Technical Support

• Debt management systems: Using specialized systems and software to manage and track doubtful debts.

• Advanced analytics: Applying advanced analytics to estimate provisions and monitor debt collection performance.

Conclusion

Ultimately, building an effective policy for managing doubtful debts and write-off of debt requires setting clear standards, precise procedures, and continuous monitoring to achieve the company’s financial goals. By implementing these steps, companies can improve cash flow management, reduce financial risks, and contribute to business sustainability and stability.