The Cost of Bad Debts

With credit comes risk. It’s just a fact of doing business.

Practically every business does a certain proportion of their transactions on a credit basis – it’s a necessity in many situations, and most credit transactions go just fine. Still, there’s going to be a percentage of customers that might have cash flow problems of their own and can’t or won’t pay off accounts in a timely fashion. That’s where your company’s accounts receivable department comes in.

It’s important to keep an even-handed policy toward receivables. While it’s easy to let older customers who may have been paying on time for years slide a little, it’s vital to keep close tabs on all receivables. Treat all customers as if they were new, and if an older customer is slow to pay on accounts, follow up with them and see if a different plan needs to be worked out. If the debt is still not paid, it might be time to consider retaining a collection agency, consider this:

If your business’s profit margin is at 20 percent and you’re stuck with a bad debt of $5,000, it will cost your business $25,000 in new revenue to recoup that $5,000 debt. If your margin is ten percent, it’ll cost $50,000 in new revenue to recoup the $5,000. Considering how much new business will have to be generated to recoup a bad debt, it’s important to pursue collection and use every measure possible to recover that debt until all options are exhausted.