“I want my two dollars” (Bonus points if you can name the movie.)
Have you ever really taken a close look at the actual cost of collecting your accounts receivable? This is money you worked for and someone has decided to stiff you. Maybe they say they’ll pay, but they don’t. Now it’s time to do something about it. For the most part, this means sending that account to a 3rd party collection service.
If you’d rather not see how much it’s really costing you to collect your money, then don’t read any further.
To start with we need to make some assumptions. If you want, plug your own numbers in, but I’m going to make these assumptions:
- Your internal efforts consist of letters, emails and phone calls, and you do this for at least 6 months. You start this in the 1st month they are past due.
- At month 4 you employ the sales person to help in the efforts.
- The average account produces $2,000.00 in sales. (plug in your own numbers if you’re calculating along with me)
- You use a traditional collection agency when you can’t collect on an account. They charge you 30% of what they collected.
- Your company is lucky* to be on the high side and makes 10% profit per job/order/sale, so $200.00 in this example. (*The national average is about 7%.)
So here we go with some math. If you are using your own numbers, the percentages might be different:
First, just in employees for the 6 months you try and collect, you spend between $80-$180.
(The Dartnell Business Institute did a study for this.)
If you are successful after 6 months then it only cost you 4%, ( 80/2000=.04 ) on the low side, of the total. (9% on the high side.)
Not bad. If the employee’s pay is already accounted for then you are right on at your 10% profit for that job. If not, you may need to subtract that from your profit, so at best you really only made 6% profit, and maybe as little as 1%.
Are you satisfied those numbers? At least you got paid, right?
But wait there’s more! And this is where things get really interesting.
You tried for six months to collect but you were not successful, so now you send it over to your collection agency.
(Here comes another assumption.)
Yeah! They are successful and collect “all” the money for this one account! So how much did it really cost? Did they send you the 70% difference?
SO here’s the math:
$2000.00 x.30 (30%)= $600.00 cost to collection agency, you got a check for $1400.00
$600+$80 (your internal efforts) =$680.00 Total cost to collect your money. For those percentage people that’s 34%.
Might not seem bad, something is better than nothing right?
But now let’s go a step further:
$2000.00 x .10 (your profit) = $200.00 profit ($1800 went to labor, materials, COGS etc.)
$200.00 – $680.00 (cost to collect) = -$480.00
YES that’s right! Even if they collected your money, it cost you the profit from that job/order/sale plus that of another two and a half jobs!
I’m not a mathematician, but that does not seem to make all that much sense. Maybe it’s just a necessary evil when it comes to credit, risk and reward?
What can you do? There are ways to recoup those losses; invoice insurance, less expensive collection agencies, different terms with clients, better credit evaluations early in the sales cycle…
Additionally, you can consider a different type of collection service. Pre-collections is a flat rate collection service with no commission fee.
Either way – knowing your numbers and where you’re money is going will help you make educated decisions for moving forward with collections.