Managing accounts and chasing up bills can sometimes end up costing a business more than it’s worth.
It is now 2018, not 1918. In 1918, everyone in town had an account at every local store and business, and all transactions were noted down in a ledger. In some country areas, graziers and farmers eagerly awaited the wool or wheat cheque, as did the tradespeople and other business owners. That single cheque a year cleared the accounts and the annual cycle started again.
Let’s fast forward to 2018. All businesses use technology that is becoming more advanced and effective and as each day goes by. This includes Point of Sale (POS) computer systems, dashboards showing business performance in real time, mobile phones, emails and importantly, electronic communication between businesses, to name a few.
This being the case, why is it that some pest managers still persist in opening an account for any business that wants one, and fail to set requirements or obligations as to the operation of the account?
It seems to me that the further a business is from a capital city, the more likely they will operate their business ‘on account’ – products and services are invoiced by the business, statements are then sent out at the end of the month and then at the account holder’s pleasure, hopefully receive payment as some point in the future. This is not the way to manage accounts.
Next time you study the debtor’s trial balance (the aged debtors outstanding) at the end of the month, as part of the monthly checklist review, ask yourself: do you seem to have a lot of dormant, nil balance accounts and account commercial customers who owe you less than $1000?
The true cost of admin
It pays to calculate the cost of maintaining and operating an account. If over 12 months you add up the cost of preparing and sending invoices, statements, collection letters and making phone calls to slow payers, it can be quite high. In my past life in the 1980s my job was collecting money. I recall that at the time, the Australian Institute of Credit Management worked on a cost of $5 per account, per month. In 2018 I would estimate the cost to be at least three times this, say $15 per account, per month.
To answer the question of who should get an account, we must look at the level of activity required to justify the cost of $15 per month, or $180 per year.
Calculate the value of your accounts
To do this calculation, you need to divide the $180 by your net profit margin. Net profit margin is the profit left from the sale after deducting both the cost of materials used and also the expenses of running the business. It is expressed as a percentage of sales.
For example, if the net profit margin is 5%, the minimum sales required to justify an account for commercial customers per month is $15 divided by 5%, which is $300 per month. Multiplied by 12 gives a result of $3,600 per year. This is the amount of business the account needs to bring in to balance the cost of servicing the account. Even at this level of sales, you are not making any money, just breaking even.
It quickly becomes clear that it does not make sense to create an account for a commercial customer if they will not generate enough sales to provide you with a profit at the end of the day. (Note that the calculation above does not take into the cost of funds tied up in the unpaid account.)
So who would I advise giving an account to? To restaurants, schools, hotels and similar businesses. Why? While they may not be doing much business with you now, and may be putting less than $3,600 a year on their account, there is a likelihood of business increasing in the future. It should be looked at on a case by case basis.
Use technology to cut costs
Whilst it’s important to set a minimum sales amount to set up an account, for the majority of clients, especially residential customers, using technology to transact business mean you can cut the costs in the credit management process. How do you do this? By using EFTPOS. Onsite payment by EFTPOS or credit card is the way to guarantee payment and reduce management costs.
Many pest managers have told me that the cost of the EFTPOS machine and the mobile model is excessive. Is it? When you look at the sales you need to produce just to cover the cost of operating these small accounts, I do not think so.
Financial Institutions have endeavoured to minimise the cost of operating accounts by sending statements out via email. They do so because they say they are trying to protect the environment – that’s the spin, but maybe it could be that they are trying to save money?
My plumber and carpet cleaner both use mobile EFTPOS machines. In the case of the carpet cleaner, he has processed the payment even before starting work! My plumber adds up the invoice and processes the payment through the EFTPOS machine onsite and receives payment on the spot. We have a come a long way in just the last 10 years. I wonder what processes we will be using for credit management in 2028.
In summary, obtaining credit and having an account with your business is a privilege, not a right. How many commercial accounts do you have that pay less than $3,600 a year? Look at the profit being lost and take action.
Peter Cox, Peter M Cox & Associates