A sale is not a sale
until the money is in the bank.                          

Sometimes that money never arrives on an invoice or an account. 

 

Bad debts are no fun.  It is natural to hate losing any collections. 

 

However, bad debts can be a cost of doing business.   In some cases, no bad debts can be a sign that not enough risk is being taken and good business opportunities are being missed.  Companies that deal with consumer accounts or have small invoices in high volume could be in industries where there will be some uncollectible accounts.

The key is to know what level of accounts receivable risk is worth taking in your business. 

 

I had a telecom client (similar service to Verizon for example) that served predominantly consumer accounts.  They were comfortable with 5% bad debts.  What made this work is that their contribution margins were extremely high- around 95%.  The bulk of their costs were in the cellular towers and other infrastructure.

 

With their cost structure they could easily support this bad debt level.  They could have 19 accounts go bad and then make up for it with just one paying customer.  This allowed them to be very aggressive and take on marginal credits that other businesses could not afford to support.

 

Some things to consider when determining the credit risk you want to take:

• What are your contribution margins and how many customers do you have to sell to make up for a bad debt?  A company that has contribution margins of only 15%, i.e. making $150 on a $1,000 sale, would have to make 6 other $1,000 sales to make up for the $850 costs in a lost $1,000 sale.  5% would probably be too high of a receivables risk to be taking. 
• What additional revenues could be generated by taking on a more aggressive credit policy?
• How do your credit policies stack up against your competition?

Having no bad debts might not be a good thing.  You might be losing business to your competition that they are making good money on.  Know what risk makes sense for you.