When you keep your side of the bargain with a customer, it is only fair that they should keep theirs by paying you… and paying you on time. Sadly, as everyone in business knows, this doesn’t always happen.
How big is the problem?
The bad debt calculator below shows you how many extra sales you will have to make in order to recoup the profit you lose on a single bad debt. For example, if your profit margin is 10%, and a £5000 invoice is not paid, then you will have to make another £50,000 worth of good sales to make up the profit lost on the one bad sale. Shocking, isn’t it?
| Your profit margin | Bad debts | |||||
| % | £100 | £1,000 | £5,000 | £10,000 | £50,000 | £100,000 |
| 1% | £10,000 | £100,000 | £500,000 | £1 million | £5 million | £10 million |
| 3% | £3,333 | £33,333 | £166,666 | £333,333 | £1.7 million | £3.3 million |
| 5% | £2,000 | £20,000 | £100,000 | £200,000 | £1 million | £2 million |
| 10% | £1,000 | £10,000 | £50,000 | £100,000 | £500,000 | £1 million |
| 15% | £666 | £6,666 | £33,333 | £66,666 | £333,333 | £666,666 |
| 20% | £500 | £5,000 | £25,000 | £50,000 | £250,000 | £500,000 |
| 30% | £333 | £3,333 | £16,666 | £33,333 | £166,666 | £333,333 |
| 40% | £250 | £2,500 | £12,500 | £25,000 | £125,000 | £250,000 |
| 50% | £200 | £2,000 | £10,000 | £20,000 | £100,000 | £200,000 |
Why does it happen?
In their 1999 survey, business finance specialists Alex Lawrie asked UK companies why they paid invoices late. The top ten reasons given by credit controllers were as follows:
23% Waiting for the cheques to be signed
22% Invoice lost
16% Cashflow problems
15% Person dealing with it is unavailable or off sick
6% Cheque is in the post
5% Waiting for the cheque run or for a new cheque book
3% The invoice is being disputed
2% We pay on 60/90 days – not 30 days
2% Missed the payment run
On a lighter note, some of the more bizarre reasons given by credit controllers when refusing to pay included:
- “The owner has been buried with his cheque book”
- “All names are put in a hat. If yours is drawn out you get paid. If not it stays in the hat for next month”
- “I do not speak English”
- “We’re in the middle of an armed robbery”
- “Not now, its the office party”
Next in this series of posts, we’ll suggest ways to make sure you don’t have a bad debt problem.
