When do you load a debt?

WHEN DO YOU LOAD A DEBT?

 

Everyday business owners and operators are faced with the same question, should I give my customer longer to pay, or should I load them as a debt? Or to put it another way, how long should I carry my customer?

 

Unfortunately like most seemingly simple questions, this does not have a simple answer; it is not just a matter of saying the rule is all accounts at 60 or 90 days. It depends on your business, how you operate and what your goals are. You will need to look at your own business and consider a variety of factors.

 

MARGIN:

 

“When do I stop making money and start loosing it?”

 

What is your true margin on the sale, and how quickly is that eroded over time? If for example your net margin is 20%, on a $100 sale you make $20 profit if paid in cash. How much is that margin reduced with each month that passes. What is the cost of borrowing (or not having) the $100.00 to your business?  If your overdraft rate is 18% that works out at $1.50 per month, this means after 30 days your net margin is down to $18.50, 60 days $17.00 etc.

 

As you can see after about 3 months you have already lost 25% of your profit.

 

COSTS:

 

“What are the real costs to my business?”

 

What other costs are there too your business of having the account on your ledger? Simply having an account will generate costs in additional administration, postage, printing statements, telephone calls etc. On top of these there are unseen costs, how does dealing with the account effect you on a personal level, is it distracting you from other areas of your business, or is it causing you additional stress.

 

RELATIONSHIP:

 

“Can I afford to loose them?”

 

All successful businesses spend a large amount of time, resource and cash building relationships with customers. What value do you put on this investment in the relationship with the customer? The higher the level of investment or relationship value, then the higher the cost of loading the debt to your business.

 

However you need also to look at the return you are getting on that investment, is the customer actually as good or valuable to your business in real terms as you think?

 

EFFECTIVENESS:

 

“If I don’t load it, what can I do?”

 

What steps in house have you taken, and what steps are there left for you to take? If all you have left is to ring them again, and the last four times you have spoken didn’t result in payment, there is no point continuing to hold the account just so you can ring them again.

 

INFORMATION:

 

“What do you know about the customers business?”

 

Lastly you need to consider everything you know about your customers business, and their sources of income. Is it a temporary problem that you can live with or is the problem much bigger?

 

 

MAKING THE DECISION:

 

Once you have considered all these factors you will then be in a position to decide at what point it is best for your business to load overdue accounts as debts. That point will be when the costs start to outweigh the benefits.

 

Having established that point (say 110 days) you should set a tripwire at 90 days. The tripwire in effect means that you review all accounts that reach 90 days to see if there is a factor that means they should be given longer to pay. In essence you should ask yourself - looking at the five factors that we consider, is there any compelling reason why this customer should get longer to pay? If the answer is no, and in the majority of cases it should be, then come day 110 load them. If the answer was yes, calculate how much longer you think they should get, and work towards that deadline.

 

While this sounds like a lot of work, in reality once you have done it once it becomes relatively simple, and the time invested will not only insure you make good decisions on how long you hold an account for, but will also give you a greater insight to your own business.

 

 

 

 This article was provided by Debtworks (NZ) Limited. It is a general guide only and not intended as detailed professional advice. For more information about this or any related topic please contact David Young (david@debtworks.co.nz) or visit www.debtworks.co.nz