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The True Impact of Bad Debt

few years ago, whilst working in a senior accounting role in a private company, I was asked by the owner to write off a $10,000 overdue debt. He figured it was only a relatively small amount and not worth the hassle to try to recover it. However, the impact of the write-off was much greater than he anticipated as margins were tight and the outlook for the business was not positive.

Our average net margin was only around 10% at the time, which meant that for a $10,000 sale, we had already incurred $9,000 in costs but in his eyes we needed to make an additional $10,000 in sales to make up the loss, which “we’d do in a flash,” he said.

In reality, for the company to maintain the status quo, we needed to generate additional revenue of $90,000 to recover the costs of the bad debt. Furthermore, things were tight and management was considering bidding for jobs with a 5% margin, which would mean we’d need additional revenue of $180,000 to generate the lost $9,000 – and that was just to break even!

After our discussion the owner decided to personally visit the customer to recover the debt. As a result it was paid in full, much to the relief of the marketing and sales team

Consider your own business and the margins you work with. You may wish to recalculate the impact a bad debt may have on your business, and it might help to share those findings with others. The results may shock them and highlight the importance of debtor management to all the relevant stakeholders.

Prudent management of Accounts Receivable is a critical component for any successful business. Fenwick Software has identified this need for our customers and to aid them we have created a specific Fenwick Gold module “Receivable/Payables Management” that streamlines the receivables process and consolidates receivables’ management into one easy to use screen. Click here for more information on Fenwick Gold Modules that can help your business.

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