Bad debt costs money. But do you know how much? Not getting paid has cost you the anticipated profit, maybe some or all the cost involved in servicing the client, and maybe more. Projections did not account for the increased amount of the bad debt. Assuming you can recover some of the bad debt with the help of a qualified collection attorney, you will need to increase your sales team to make up the rest.
To compensate for the loss caused by one or more bad debts, sales must increase by a percentage relative to your profit margin. The number of new sales needed to offset the loss due to uncollected receivables is based on the dollar value of the loss and your profit margin.
How Bad Debt Affects Your Bottom Line
For example, say you operate on a 6% profit margin and your write off of uncollected bad debt is $1,500,000.00. To compensate for the loss, you will have to produce an additional $25,000,000.00 in sales. As you might imagine, selling an additional $25,000,000.00 will require an increase in your sales team.
Shown below is a chart specifying the amount needed to offset losses from bad debts. It is based on the dollar value of the loss and profit margin:
Your Write-Off | Profit Margin | ||||
2% | 3% | 4% | 5% | 6% | |
You’ll require this additional amount sales to offset the loss | |||||
| $100,000 | $5,000,000 | $3,333,333 | $2,500,000 | $2,000,000 | $1,666,666 |
| $250,000 | $12,500,000 | $8,333,333 | $6,250,000 | $5,000,000 | $4,166,666 |
| $500,000 | $25,000,000 | $16,666,666 | $12,500,000 | $10,000,000 | $8,333,333 |
| $750,000 | $37,500,000 | $25,000,000 | $18,750,000 | $15,000,000 | $12,500,000 |
| $1,000,000 | $50,000,000 | $33,333,333 | $25,000,000 | $20,000,000 | $16,666,666 |
| $1,500,000 | $75,000,000 | $5,000,000 | $37,500,000 | $30,000,000 | $25,000,000 |
| $2,000,000 | $100,000,000 | $66,666,666 | $50,000,000 | $40,000,000 | $33,333,333 |
In the first place, great salespeople are tough to find. Consider the hard and soft costs to locate, invest in, and train one or more that will successfully sell good collectable accounts. As shown above, if you are the business owner with the $1.5 million write-off, you will need several.
Make sure the new team members don’t churn sales. All in all, that will just increase your level of bad debt.
Organize Sales Effort to Help Prevent Bad Debts
To properly organize your company’s sales process, acquire up-to-date and complete client information. Match that with sales management technology to decrease the number of accounts receivable while improving their collectability. Without delay, develop a sales process that considers collection and keep an eye on the bottom line. Increase cash flow, improve client relations, and elevate the financial solvency of your company.
At FFGN, we’re here to help you set up your sales department with proper documentation from before the first hello to a signature on the dotted line. Moreover, we believe in being proactive about getting our clients the money they deserve. In any case, get in touch to see what we can do for your bottom line by email or phone (212) 686-0100.
