The financial impact of writing off irrecoverable debts (aka. Bad debts) depends on various factors, including the size of the debts, the financial position of the organisation, and the accounting policies followed. Here are some things to consider before writing off those aged receivables:

Revenue Impact

Writing off irrecoverable debts means that you as the business owner are acknowledging that your business will not receive monies owed. The decision to write off irrecoverable debts results in a direct loss of revenue which can have a detrimental impact on profit.

Statement of Profit & Loss Impact

Recognising a bad debt on your Statement of Profit and Loss (P&L) increases your businesses expenses, affecting net income and can impact your profitability ratios (such as Gross Profit Margin and Net Profit Margins).

Statement of Financial Position Impact

Believe it or not, monies owed to your business in your Trade Receivables Control Account are classified as assets within your Statement of Financial Position (Balance Sheet). When writing off irrecoverable debts, you are decreasing the assets of your business. By doing this you can impact financial ratios (such as Current Ratios and the Accounts Receivable Turnover Ratio)

VAT Impact

Depending on whether your business is VAT Registered or not, writing off bad debts within your business may have VAT implications. By reducing your revenue you also lower your VAT Liability.

Investor and Creditor Impact

As highlighted above, writing off irrecoverable debts impacts financial ratios of your business which may be used by Investors or Creditors to assess your businesses financial health and credit worthiness. Writing off monies owed to the business could raise concerns surrounding credit management as well as the quality of your customer base. This could affect your ability to gain investment or lines of credit in the future.

Resource Impact

Writing off irrecoverable debts may signal the end of collection efforts for those specific debts. You might decide to focus your resources on creating better credit control processes to avoid having to write off monies owed in the future, building a better customer base or improving credit management risk assessments when onboarding new customers.

In summary, it is important to note that each business will have a unique approach to managing aged debt, you may already have policies and procedures in place to assess and write off monies owed. The actual impact of writing off debts in your business will depend on your businesses current circumstances as well as the factors highlighted above.