The true cost of bad debt, and how to combat it!

You certainly don’t need me, as an accountant, to tell you that bad debt is not good for your business. That much is obvious. But are you aware just how damaging it can be? Let’s imagine that, in all good faith, you have delivered your normal high level of service and sent an invoice for £5,000 (which would normally have given you a 10% margin). The ungrateful, unscrupulous and undeserving receiver of your services has, however, declined to pay up. You’ve wasted time, effort and hassle chasing the debt until, finally, you are forced to write-off the amount in full, robbing you of your £500 profit.

In real terms, however, you have not just lost £5,000 of turnover or £500 of profit because most of it is actually a cost. To replace the amount that you have written off, you really have to make a further £50,000 of sales. Assuming the same margin (of 10%), these sales would give you a profit of £5,000 and replace the ‘real cost’ of the bad debt. Scary isn’t it?

Three ways to avoid such an expensive eventuality

Note: before you write these suggestions off, try working out the true cost of your last bad debt – as described above. (Get in touch if you need some help.)

1.   Put your prices up: Most businesses are frightened of doing this, just in case they lose customers. The reality is that, if any do decide to go elsewhere, it is usually the bad payers that go first. That, however, is not the main purpose behind my suggestion – it is much cleverer than that. At the same time that you increase your prices, you announce that you are introducing a prompt payment discount. If you make this discount the same amount as the increase, then it simply means that you will get paid more or paid more quickly.

2. Ask for payment upfront: I know that some people reading this will be aghast at the idea, saying, “In my marketplace that simply isn’t done!” The truth is that, most of the time, the standard ‘payment terms’ in any given sector are tradition and habit, not necessity. Would it do you any harm to ask some of your customers to pay upfront? Surely, the worst that can happen would be for them to refuse; but maybe some might be happy to oblige. I know of many people who have made the transition to upfront payment successfully.

3. Create a ‘prompt payment’ benefits package: There could be lots of ‘low’ cost to you but ‘high’ perceived value benefits that you could offer customers as a reward for paying early. You could try some of these ideas:

  • Priority booking for services or appointments

  • Free upgrade to express delivery on orders

  • Free delivery on all orders

  • Lower minimum order quantity

  • Free helpline or technical support

  • Extended warranties

  • Exclusive membership of a user group

  • Advance notice of upgrades and new products

The key is to let every customer know about these benefits, but make them the exclusive privilege of the good payers. There are many other methods that you could try, so get in touch if you need some help or advice.