Don't delay debt action

All suppliers know that the offer of credit terms is often essential to the sale. It’s not just a competitive marketing tool; it’s a prerequisite to selling and recruitment of new customers.

But of course it has a cost. With credit comes the possibility – indeed the inevitability – of losses from bad debts. But there is also the draining effect on working capital from an inflated debtors’ balance with consequent reduced cash flow to the enterprise.

The decision to offer credit can be a life or death one and therefore the enterprise’s credit policy must be mathematically rigourous. There are four main elements to an enterprise’s credit policy:

•    Credit qualification: which customers qualify for credit terms and on what basis?
•    Credit risk analysis: what are the probabilities of default?
•    Payment terms: what is the optimum set of terms for the customer in question?
•    Debt collection: what is the organisation’s policy with regard to collection of the debt?

It is this final element, debt collection, which often receives least attention.

As we have written before in these pages, organisations often seem to be incredibly slow at dealing with old ledger balances and then – when they finally decide to do something – write off the balances with extraordinary alacrity.

As a debt collection agency, StubbsGazette clearly has an interest in promoting the referral of hard case debts to a third party organization such as us. But not only is outsourcing often seen as a last resort, the fact is that delaying the decision to outsource also has costs.

In short, the practice of delayed outsourcing leads to two categories of losses.

First, the opportunity cost of delaying the outsourcing decision: this is the costs of funds foregone, in other words, the balance that the collections agency collects, discounted at the cost of funds which is the appropriate discount rate for the period in question.

To take an example: firm A has overdue balances of €1 million. It is currently running an overdraft of €500,000 at 10%. It decides to place the balance with a collections company after six months’ deliberation. The collections company ultimately recovers €200,000 net of fees over a three month period.

Let’s leave aside the performance of the collections company in terms of its collections performance. In other words, we’re assuming that the client firm could collect the same amount, in the same time, and we’re ignoring the internal associated staff costs – these are quite major assumptions.

Instead let’s focus on the delayed action. Not having that €200,000 for six months to set against the €500,000 overdraft has cost the company €10,000 in interest (before tax).

But the major damage is done with the deterioration in the quality of the overdue debts. Put simply, the longer action is postponed, the lower the chance of ultimate collection.

It is difficult to put an estimate on just how much write-off levels increase with age but while the failure rate of Irish companies in general is around 1% per annum, the failure rate of companies with a record of consistent arrears is around 5%. Delaying decisive collections action for 12 months therefore has fairly exponential effects on collectability.

Deterioration of the typical debtors’ ledger also varies but some benchmark figures for companies with impaired creditworthiness would be as follows:
•    At 90 days average collectability is around 60%
•    At 120 days this drops to 55%
•    At 150 the rate is 50%
•    At 180 the drop below 150 becomes pronounced

The message is: delaying decisive action on past due debts has a material effect on the bottom line.

And finally, don’t be too hasty in writing off debt. Each and every balance on the debtor’s ledger is potential cash for the business. And yet, while most companies have extremely stringent controls on accounts payable, the practice with overdue accounts receivable can be cavalier.

Apply the following checklist:

•    In the case of a liquidation, cross-check the statement of affairs and the balance owed to your business
•    In a receivership, make sure the receiver recognizes goods title
•    In the case of a “missing” debtor, identify home addresses in the case of sole traders who remain personally liable, and make direct contact.
•    Adopt a monthly rolling system for formal write-off of balances: keeping on top of the ledger ensure less likelihood of letting go a live debt.

Top Judgments Registered


Pure Fitout Associated Limited
Address: R/o Unit 1 Building 1, Central Park, Mallusk, Newtownabbey Co Antrim
Amount: €257,165.09


Room to Improve Building Services Limited
Address: R/o 29 Molesworth Close, Knocksedan, Swords, Co Dublin
Amount: €49,968.16


William Gray
Address: Feighcullen Farm, Feighcullen, Rathangan, Co Kildare
Amount: €29,535.44


Rory McAtavie
Address: 19 Wylies Hill, Ballybay, Co Monaghan
Amount: €28,138.31

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