[QUESTION]

Is it always good policy to reduce the firm’s bad debts by “getting rid of the deadbeats”?

[ANSWER]

No. Only if the added profitability of the additional sales to the “deadbeats” (less bad-debt loss
and other costs) does not exceed the required return on the additional (and prolonged) investment
in accounts receivable, should the firm cease sales to these customers. Some firms (such as
jewellery or audio equipment dealers) are very happy to sell to almost any “deadbeat” because
their margins are very high.