It is a common scenario. You have tried to chase a debt but are getting to a point where you think it might be easier to just write it off. You think to yourself there is no point in wasting more time – so you make the decision to ‘cut your losses’ and just write the debt off.
But did you know the actual cost of a debt is much higher than the amount you have written off? In fact, that $5,000 debt could cost your business $50,000 (or even more) and that is not even taking into account the costs in trying to collect the debt.
The simple examples below highlight how expensive a bad debt can be:
EXAMPLE 1: Bad debt amount $5,000
Profit margin 10% (i.e. for every $100 of sales you make a profit of $10)
Amount of new business required to cover the $5,000 debt is $50,000.
EXAMPLE 2: Bad debt amount $1,000
Profit margin 5% (i.e. for every $100 of sales you make a profit of $5)
Amount of new business required to cover the $1,000 debt is $20,000.
So what can you do?
A business’ accounts receivable is quite often one of the largest assets that a company has. Without debtors paying their debts on a timely basis, a company will be left without sufficient cashflow to manage and grow its business.
It would be much easier for a company not to extend credit in the first place, but it is a common business practice for most companies to extend credit to its customers – and with this there is always a risk that the account will not be paid on time or even paid at all. In fact, a lot of companies would simply go out of business if they did not offer credit terms to their customers.
The risks of extending credit can be minimised if good business practices are implemented on a timely basis – remembering that the longer a debt remains outstanding the greater the likelihood that it won’t get paid, so decisive action is required.
A simple tip to keep the cash flowing in, is to treat all customers the same. It is quite common for a company to implement strict procedures for new customers, but be a bit lax on older customers who have been reliable payers in the past.
Treat all customers as if they are new and constantly review your accounts receivable for amounts not paid on time and take action quickly – including engaging a debt collection agency if necessary.
Another tip is to make sure you have the correct procedures in place before you provide credit to a new customer. Brodie Collection Services offer free credit application form and personal guarantees form templates which can greatly assist with this. In addition, we offer a credit control report which gives a perspective position on the level of risk of doing business with your applicant.