Every business owner or manager prepares a business plan every now and then.
Business plan tends to include an executive summary, a description of the business opportunity, marketing and sales strategy, operations and financial forecast.
The financial forecast usually includes sales forecast – the amount of money you expect to raise from sales. It also includes cash flow statements – your cash balance and monthly cash flow patterns for at least the next 12 months.
Profit and loss forecast -the level of profit you expect to make, given your projected sales and the costs of providing goods or services and overhead.
99% of the time, P&L (Profit and loss) forecast will never include proceeds collections costs in it, which will result in a missed forecast.
Let’s say you have made your sales goal, and all the costs around it were spot on – exactly as expected. You aren’t meeting your P&L forecast…
Payment Cost – receiving payment via credit or debit card isn’t free. In fact, payment processing companies will take few percent of your sales (not profit). You must plan for it, otherwise, your profit margin may not be sufficient to make you a profitable business. PayPal and other payment services aren’t free either.
Even if you consider to avoid it altogether and receive checks and wire transfers for payments, you must factor in check processing costs. Your bank sometimes charges you for incoming wires – it is especially true for wires from your clients located abroad.
Client chasing and operations costs – checks from your clients won’t process themselves. Wires don’t get posted to your cloud accounting solution unless someone does it.
On top of this, not all of your clients will pay you on time. Payment stats for credit invoices (net X payment terms) have less than 50% paid on time in the US, with similar numbers in the EU. About 15% go unpaid 90 days after it’s due date.
Many businesses employ collections specialist or use external service. Even you don’t employ a specialist to follow up on unpaid invoices, you or someone on your team does this for you, part-time. Each hour spent on invoice tracking cost you tens of thousands every year.
3rd party collections – if you electing to use external service to collect from your clients, you have a hefty fee to go with it. Collections agencies will charge between 10% for large invoices that went recently overdue to 50% for old or small (below $1000) invoices. Even at the very high-profit margin, this can have a crippling effect on your cash flow and P&L and run you out of business.
Bad Debt Reserve and Debt Write-Offs – 2.2% of all invoices in the US go unpaid, with a slightly lower number in the EU. This means that for every $100 of sales, you can expect to end up with $98 in your pocket.
How do you lower receivables associated costs?
Awareness will solve half of the problem, so if you have read up to this point, you are already ahead. You will incorporate the costs into your plan.
Having a well-defined plan of actions will help you to get paid faster by your clients, which in a way will also help you to decrease write-offs.
A stat we particularly like is that receivables automation lower write-off by 25% and increases cash flow by 20% on average. All of this while saving 90% of time associated with collections prior to automation.
At any size of business, the benefit of automation is measured by tens of thousands per year. This can be the difference between success and not make ends meet.