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When an invoice remains unpaid, entrepreneurs often underestimate the cost for their firm. The direct consequences on the profit are easy to apprehend. Nonetheless, it is enlightening to take into account the additional margin rate and turnover to undertake in order to erase the loss endured.
In the hereinbelow example we analyse the situation of a company whose annual turnover is 6.000.000€ and supports several outstanding debts for a total of 45.000€.
If its margin rate in relation to its turnover is of 5%, it will have to increase their sales of 900.000€ in order to soak the consequences of these outstanding debts up.
It will be necessary that the commercial team assume a 15% growth of the turnover in order to compensate the endured losses. It is undeniable that this aim/goal will be hard to achieve in a competitive market. Not only these outstanding debts will cause damage to the profit and the financial situation of the firm but also they can displease the sales force.
The process which consists in mandating a debt collection company is made with lots of reluctance:
• The firm is afraid that the client/customer relation will be disturbed
• The cost seems considerable especially in countries like France where it is very difficult to bear the recovery costs to the debtor who isn’t paying his/her invoice.
To call on a debt collection company is like entrusting the management of a staff canteen to the caterer. It becomes essential if we want to focus on our core business, to let the specialists do the tasks which the firm does not necessarily have the internal skills for.
If the invoices to be recovered are sent to the debt collection company in a reasonable period after the outstanding debt’s due date, it is likely that in the hereinabove example, an amount between 25.000 and 30.000€ free of costs can be recovered. Needless to say that it will depend on the file’s quality and the fact that all cannot always be collected.
In most cases, the recourse to a debt collection company will help improve the viability and the treasury of the firm.
Finally, a low loss ratio will enable the company to negotiate a lower rate for its credit insurance bonus insofar as it has subscribed to such agreement.