Why did you go into business for yourself? You did it because you thought you could do a better job than others, you did it for the opportunity to make more money and you did it so you could be the boss. After all, no one else can match the passion, dedication and hard work that you bring to your business. There’s one thing you might not have thought of however, and that is that like all of us, you are not equally talented at all things. And now that you are a business owner – you have to do all things! You have to run the load calculations, you have to make the sales, you have to run the service calls, you have to do the books and you have to collect the bills. Some days, perhaps many days, there just isn’t enough time to do everything, so those last two things get set aside for “later”. Those last two things being the books and collecting the bills. The second of those two – collecting bills – is a lot more important to your business than you might think. Consider the chart from last week’s blog, shown below.
What is that really telling you? For one, it shows you that the job of collecting the bills cannot be sloughed off until “later”. According to the Commercial Collection Agency Association who developed this chart, you have less than a 90% chance of collecting a bill that is only 30 days old. By 90 days, your odds are less than 70%. Now, let’s turn that into dollars. What is the value of a 90 day old receivable that you originally billed out at $3000? According to this chart, it’s only worth about $2100 because by all odds you’re only going to collect about 70% of your 90 day old bills. Even worse, what happens if you have to write off that $3000 sale. Consider the following chart which defines the amount of sales you need to recover a bad debt write-off of $3000, given your company’s net operating profit.
Therefore, if your net profit percentage is 2% you need $150,000 in additional sales to recover the $3000 you wrote off. Keep in mind on that $3000 sale that you just wrote off, you have already paid your suppliers for the materials, you have paid for the labor that created the sale and you have paid for the overhead that supported that sale. The only thing you haven’t done was to collect the debt which paid for those expenses – plus of course the profit which that sale was supposed to generate. If the two charts shown above don’t shock you into paying attention to your sales terms and accounts receivable, then it’s probably because you already know this and have good processes in place.
Of course, collecting when the job is complete – and letting the homeowner know of this requirement up front – is a great first step in reducing receivables to begin with. This policy coupled with having an array of consumer financing tools available can go a long way to avoiding some of the nasty numbers shown in these two charts.