Tips og triks
Bad debt losses can cost you more than you think
Many people are surprised to learn how much more they need to sell just to recover what they lose when a customer fails to pay.
For most companies, only a fraction of sales revenue goes directly to the bottom line to improve profits. Cost of goods sold (COGS), employee salaries, marketing, and other expenses mean that margins are significantly lower than 100 percent.
The lower the operating margin, the more demanding it becomes to compensate for bad debt losses - that is, when customers do not pay for goods and services that have already been delivered.
Example: Operating margin of 10%
The company normally keeps 10% of its revenue as profit.
A bad debt loss of NOK 100,000 occurs.
You must then generate an additional NOK 1 million in sales just to earn back the NOK 100,000 that went unpaid.
Preventive and Remedial Measures
To reduce bad debt losses, you - as an auditor, business leader, or CFO - should work with both preventive and retrospective measures:
Advance credit checks of customers and establishing clear payment terms. This allows you to reduce the likelihood of bad payers and spot early on if an invoice is not paid on time.
Solid routines for debt collection. These routines should be in place prior to any sale, ensuring that reminders are sent out within the deadlines set by official regulations. The processes should make it easy to initiate formal collection procedures.
Good Advice
Kravia assists companies, organizations, and auditors with efficient and effective debt collection routines. You can read more about the services Kravia offers to improve liquidity here.