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
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
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