Have you compelled yourself to finish watching a bad movie because you have already invested an hour or so and just want to see how it ends? A sunk cost is like a bad movie you keep watching. There comes a point when an outstanding receivable transitions into a sunk cost. The resources you have at your disposal (staff, search tools) yield diminishing results and both the balance outstanding AND your cost to collect are now irrecoverable.
Eventually it makes more sense to stop the movie and do something more productive with your time.
So what can you do – not issue credit at all?
Some may argue that any invoice not paid at the time of service is an interest-free loan to the customer, whereas others see the value in extending credit to reach a greater volume of customers. Also, there are a number of industries where payment at the time of service is not customary or practical, such as healthcare. Credit, in some form or another, is here to stay.
Understanding your cost to collect
It is important to capture your total cost to collect to fully understand your revenue cycle. Understanding the hidden costs your organization takes on during the collection process enables you to identify areas for actionable improvement.
Every action taken to collect outstanding balances such as emails, demand letters, and telephone calls has an out-of-pocket expense, such as wages and material costs.
What is often overlooked are the inherent opportunity costs associated with continued contact attempts on unresponsive bad debt. At what point is it more economical to pursue other activates such as growing your business, fulfilling new orders, or billing good customers that do pay? Also, you only have so many employees – at what point should your billing team focus on accounts that are only weeks delinquent and not months?
Whether you are a sole proprietor or a large corporation, utilizing Key Performance Indicators (KPI) will help you develop attainable A/R goals. For instance, knowing the average number of contacts (e.g., number of calls, emails, letters sent) needed for resolution on plus-60 accounts will help your staff identify problem accounts before it’s too late – which in turn lowers your cost to collect.
If all this sounds overwhelming – don’t worry! We are here for you. We love to help companies develop effective recovery solutions.
Business Development Manager
Columbia Collection Service, Inc.