The 80 - 20 Rules

Being in business today it is vital that we remember the 80/20 rule. For those that have never heard of this rule it is that 80% of your business will be carried out with 20% of your clients. For those of you who think I’m wrong, analyze your order book.

The other 80/20 rule is that on average 80% of your clients will pay their invoices on or before the due date, 20% will not. It’s these that you should be worried about.

As a Debtologist I am often asked to explain how just 20% slow paying accounts can help to ruin a business. When I do ,I like to use a fictitious company called Bloggs & Co which produces widgets. Bloggs have 100 regular customers who on average spend £1000 per order, the widgets cost £200 which gives Bloggs a gross profit of £800 per order.

If we apply the 80/20 rule, then 80 customers will settle within the agreed settlement terms & 20 obviously will not. Of these 20, 80% will pay when pushed during the month 20% (4) will not. At the end of month 1 Bloggs will have issued 100 invoices worth £100,000 (£80,000 gross profit) however they will find that they have £20,000 outstanding. If they are sensible they will employ a credit controller, let’s call her Flossy and no mater how good Flossy is by the end of month 2, £4,000 will be outstanding.

The problem comes that at the end of month 2 while the turnover will be £200,000 they will not have 4 outstanding customers they will have 8 debtors and not owed £4000 but £8000. Month 3 will see turnover grow to £300,000 their bad debts however will have grown to £12,000 and so on. If things were to carry on this way at the end of the year the company will have a turn over of £1.2M (£960,000 gross profit) and with a bad debt provision of £48,000 and this figure could represent a smaller overdraft, a new member of staff or even a new car!

Generally what happens next is that Flossy is then asked to concentrate on the bad debt that the company has accrued. However, Flossy will also be expected at the same time to ensure that the current invoices are paid. In reality, however good Flossy is, a number of the invoices will eventually have to be written off as uncollected.

So how can you insure that you minimise your bad debt exposure. There are 3 things you should consider. The first thing is to recognise is that you can’t expect Flossy to act as a credit controller and debt collector so you can either employ another Flossy or 2 you can speak to a reputable debt collection agency. The agency will be able to advise you what your best options would be, it could be to outsource the debt collection to them or they may have systems in place that will allow Flossy to reduce the 4 bad payers to one or two. The only way to find out is to make contact with a debt collection agency. The 3rd option is to divorce those who do not pay their bills, remember they are not customers they are debtors.

For more information about Deanem Collections and our services please visit our website www.deanemcollections.co.uk

What’s the connection between losing your virginity and becoming a Credit Controller?

What’s the connection between losing your virginity and becoming a Credit Controller?

As a Debtologist, I’m often asked to provide coaching to new and inexperienced credit controllers. I recently met a lovely lady called Sarah* who had just been asked to take over as her companies’ credit controller. Sarah was in her mid to late 30’s and had been by training, a conveyancing solicitor. When she married, she stopped working unfortunately due to very messy divorce she had to return to work & the only job she was able to get, was as an office administrator. Her brief was to bring the companies' debtor days down from 120+ to nearer 30.

I met Sarah during her first week and she was still working up the nerve to pick up the phone to call her late paying customer. When we spoke Sarah explained thather problem was as she had had no training, she was concerned about what should she say & act, what happens if the customer was rude, slammed the phone down etc and as much as I tried to reassure her and take her through credit control procedures, she was still unsure.

Sarah had also mentioned that the only thing she missed about her husband was the sex! She explained that he had been her “first” but she didn’t miss the bullying or her interfering mother in law. Once she had told me this, I was able to coach her in the art of credit control.

I explained that being a novice credit controller was very much like having sex for the very first time as most people don’t really enjoy it but wanted to get it over with, she said she could relate to that. However, I carried on the more you made love the better it becomes. I explained that it was exactly the same with credit control as the first time you pick up the phone to ask your debtor to settle their account is nerve racking and not something you really enjoy. But like sex the more times you “do it” the more credit control becomes enjoyable. However, unlike sex where you could get accidentally pregnant or worse, with credit control the pleasure is reduced debtor days, a swollen bank account and no nasty social diseases.

When I last spoke to Sarah, following my advice and utilising Deanem's collection services she had managed to get her debtor days down to 45 and was delighted to be told by a slow payer that he dreaded her telephone call.

If you would like more details of our unique approach to credit control training, please visit our website www.deanemcollections.co.uk
*Sarah is not the real name of the person concerned.