Is getting paid costing your company too much?
Receivables are assets on your company’s balance sheet, in most cases with a real, actual dollar value. But at what point do those assets become worthless?
Accounts receivable, in accounting-ese, is money owed to you by your customers or association members that you expect to get paid soon. When it goes unpaid, at some point you need to: charge a late fee; charge interest; write off the debt; send it to collection; or let it sit there for a while longer, just in case.
Hot take: chasing late receivables does not create value, because the receivable is already an asset. At best, it improves the quality of that asset from “bad account” to “cash in hand”. This is why collecting revenue can get more expensive than it’s worth if you’re using the wrong people to do it.
Does that mean you should ignore it? Absolutely not. But however you go after it, there is a cost. Let’s think about your unavoidable costs:
- Charging a late fee or interest. In theory the longer the debt goes unpaid, opportunity cost increases. It may never get repaid, the cash cannot be invested for higher ROI, or this customer may struggle with other payments.
- Write off the debt. While this can be healthy, it is also a recognition that your company invested money (providing a product or service in advance of payment) that took a 100% loss. Just be ready to explain it your CEO, CFO, or board of directors.
- Send it to collection. If you pay a collection agency then your cost is typically a percentage of the outstanding debt.
- Delegate it in-house. Use your own employees to chase that money down. What could go wrong?
So you’ve decided to delegate an employee to get that money. Here’s what we know:
- $debt = Outstanding debt from nonpaying customer
- $employee = The cost of your employee’s time to speed-dial the customer until they pay up
- $opportunity = The opportunity cost of your employee not doing things that create value
Let’s do the math:
- $debt – $employee = cash. The funds you recover from the bad account are reduced by the cost of your employee to get those funds. This is also true with outside collections.
- $debt < $employee. Are you using an expensive senior employee? A top performer in another area? A proven sales leader? A department head? Unless that person is fast, lucky, or this is already their job, then you are losing money.
- $debt < $employee < $opportunity. But wait, not only did you lose money by using a top employee but you also lost the additional value they would have created had they just continued doing the job they were hired for.
- $debt – $employee > $opportunity. Perhaps you’re using a less expensive or junior employee who nonetheless has shown great promise in another area. So why aren’t they doing that? You’re still losing money because the junior employee today – your long-term investment – is the top performer tomorrow.
- $debt > $opportunity * 10. You have so much in receivables that even your high-cost employee’s time is worth less than the money owed by customers. This is a red flag. Either the market is telling you something or you may have serious structural issues in your company.
What do you do with that bad account then? I’m not saying which choice is best. Still, a high-cost resource like a top performer should be adding new value – doing their job – and not preserving existing value that someone else already created.
Everything has a cost. Even the intangible costs that dance like a shadow on the walls will drag your balance sheet if you don’t have the conversation.
