Sales and credit go hand-in-hand in most successful businesses. In order to obtain new customers, you have to offer credit terms. And, every credit manager knows that some of those sales will be written off as bad debt.

That was the business scenario most of us operated in for years. But things have changed – dramatically. Now, even long-standing customers are struggling. You can no longer take anything for granted. You have to keep a close watch on all your accounts. The “good” customer of yesterday can quickly become the bad debt of today as the economy continues to take us into territory most of us have never navigated before.

Here are some sobering statistics.

Data on 2nd Quarter 2009 business bankruptcy filings reveals:

Q2 2009: Chapter 7's up 52% over Q2 2008
Q2 2009: Chapter 11's up 139% over Q2 2008
12-month period ending 6/30/09: Chapter 7's up 60% over 12-month period ending 6/30/08
12-month period ending 6/30/09: Chapter 11's up 97% over 12-month period ending 6/30/08

But, as long as you keep the write-offs to a minimum, it’s just an unfortunate cost of doing business. Right?

Yes and no. Those uncollected dollars nibble at your company’s sales volumes and profitability. And, they could be slowly eating away at the health of your company.

Let’s look at some numbers.

Assume that your net profit is 5%, and your projected sales volume for 2009 is $3,000,000.

In January, your company made a $500.00 credit sale at net 30. The customer didn’t pay. Because it’s not a huge sale for your company (just 0.017% of annual sales), and your department is understaffed and overworked, internal follow-up never happened. By the time the account was placed for collection, the debtor had skipped and your collection agency eventually suggested the debt be written off.

How many sales dollars does your company have to make to offset a $500 write-off? Believe it or not, $10,000!!

And what if your net profit is only 4%? You would have to make $12,500 in sales!!

The chart below puts some numbers in perspective.

The bottom line: Uncollected dollars are a real threat to the survival of your company.

As delinquencies and defaults increase, and they will for awhile longer even if the economy is starting to turn around, companies need to take AR management more seriously than ever. A good strategy: either have an internal follow up plan in place that deals with accounts as soon as they go even one day past due; or, place them much sooner with a professional collection firm.

Whatever you do, don’t just rely on business as usual. Those who take a proactive approach may well be dubbed a knight in shining armor.

*****

Subscribe to the Credit-to-Cash Advisor
Monthly e-Newsletter -- It's Free

This information is provided by ABC-Amega Inc. -- providing 1st and 3rd party commercial collection services since 1929, and collecting in more than 200 countries worldwide. For further information, contact info@abc-amega.com.