Sometimes business owners have accounts receivable that will never be paid. They may also have inventory that they never use. If this feels like a loss, it’s because it is. Ask your accountant about using it to your advantage and writing it up as a loss on your tax return to help save money.
Even the most optimistic business owner will look at their accounts receivable and admit that there are amounts that will never be collected. Perhaps there’s an invoice for a product that was sold to a customer a few months ago, but he hasn’t paid. Or there’s a sweet deal that was cut with a company in Nebraska last winter that’s not returning phone calls anymore.
Some of these receivables aren’t receivables at all. They’re bad deals.
Take a look at your inventory. You’ll see lots of inventory that’s being used for jobs or that was freshly purchased specifically for an order received. But there’s other “stuff” that’s just sitting in your warehouse or storeroom. Some of this stuff you bought at a low cost thinking you’d be able to sell it at a nice profit. Or maybe you purchased it for a customer whose business soon went under and then they couldn’t pay you. Some of that inventory you’re not going to be able to sell. Those purchases were bad deals too.
Being in business means sometimes making bad deals; it’s inevitable. It doesn’t mean you’re a bad businessperson. It means that you’re just a businessperson. You took some risks and sold stuff to someone that probably didn’t have a great credit history but you felt confident they’d pay up. Or you bought something for a great price with the hopes of selling it for a larger margin than your typical items. When you make deals and take risks, sometimes things don’t work out. It’s OK, the fact that you’re still in business means that more deals and risks taken work out than don’t, right?
So, what should you do with that bad receivable or un-sellable inventory? Consider getting rid of them both. You could possibly write them off your books. In the case of the inventory item, you could perhaps take it out of your storeroom and physically dispose of it. Getting rid of the bad receivable can help your mood because you won’t instantly get annoyed every time you look at your list of receivables and see that customer thumbing his nose at you. Getting rid of the unusable inventory item can help free up space for better inventory so it’s potentially a better use of your overhead. Keeping these assets around can take value away from your business. And as business owners, our job is to increase our company’s value not do things that diminish it.
More importantly, getting rid of these bad assets can create a tax benefit. Ask your accountant, it could be a deduction. As long as it’s off your books and disposed of you might be able to take the write-off. So stop being so sentimental and consider taking the deduction.
Be sure to check out this great article on ways that small business owners can save money on their taxes. You’ll learn more about abandoning property and assets, keeping profits lower during the end of the year to help reduce your tax rate, sheltering profits in retirement plans and more.