Final answer:
To minimize bad debts, firms can engage in diligent credit management, set clear payment terms, and implement effective debt collection practices. These measures help firms manage credit risk and maintain financial stability.
Step-by-step explanation:
Firms can minimize bad debts through a number of strategies to ensure they maintain a healthy cash flow and reduce financial risks. One important approach is credit management, where a firm assesses the creditworthiness of a potential borrower before engaging in business. This can involve checking the borrower's credit history and current financial stability.
Another method is establishing clear payment terms such as stipulating advance payments or installments, which can help manage cash flow and limit the potential of non-payment. Lastly, firms can also make use of debt collection practices, which involves setting up an effective procedure for following up on overdue payments and, if necessary, taking legal action against defaulters.
Implementing these strategies can help a firm build a strong revenue base, earn profits, and potentially use various borrowing methods like banks and bonds to facilitate their growth while controlling credit risk.