Most entrepreneurs can tell you a thing or two about it. They provide the agreed delivery or service on time, write their invoice and then first of all … nothing! Exactly! The payment date passes without any money being received and the result is a short-term delay in payment, but in the long term, non-payment.
If this scenario sounds familiar to you, you should definitely take action. Because even small payment defaults in percentage terms can become a big problem.
A customer doesn’t pay: small problem – big effect
Let’s take a look at an example calculation: A small company with annual sales of EUR 1 million generates a profit of EUR 80,000, i.e. a return of 8%. If there is now a default rate of only 2% of all invoices issued, this means a loss of 20,000 EUR. To make up for this loss, however, the company must increase its sales by no less than 33%, i.e. 333,333 EUR – and that’s quite a lot!
If the return on investment is lower, for example only 4%, the ratio looks even less favorable. Now, with the same assumptions, the 2% loss of receivables has halved the annual profit without losses – so the annual turnover must be doubled to make up for the loss.
This example calculation shows the problem: Just because a ridiculous-seeming percentage of 2% of invoices is not paid, the entire business has to perform twice as well! Very few companies manage that – and even if they do … who then guarantees that the receivables will not go unpaid again?
Should the default rate now rise from 2 to 3%? Then the company is forced to triple its sales to compensate for the loss. Tax levies on the profits generated are not even taken into account in this consideration. These would make the picture even worse.
How can payment defaults be effectively prevented?
Roland Zuckerstätter, Managing Director of Eurincasso GmbH, has compiled valuable tips for you on what you can do in the event of non-paying customers. His expert tips for avoiding bad debts and significantly improving risk management:
Tip 1 against non-payment: Professional receivables management
Professional receivables management can reduce the risk of non-payment. This starts as early as the quotation preparation stage. Put the exact order declaration in writing. Partial payment agreements should also be clearly defined in terms of amount and timing. Always issue your invoices promptly and specify a clear payment deadline. If an invoice is not received within the payment deadline, a friendly phone call or e-mail that clearly explains the circumstances can help. If not, you should lose no time and already send the first payment reminder and to the customer.
If the payment was simply forgotten, it will probably arrive quickly now. However, if your customer is in payment difficulties or if he systematically postpones the payment in order to improve his own liquidity, you need to be more clear. You are NOT obliged to remind the debtor umpteen times. We recommend to do this only 1x (max. 2x)! Time is money. After all, you have provided your service on time and can therefore also expect punctual payment according to the due date on the invoice.
Tip 2 against non-payment: debt collection
Another way to limit losses due to bad debts is to hire a debt collection company such as Eurincasso GmbH. If your customer has not paid despite reminders, we can help you efficiently and professionally with out-of-court debt collection.
As specialists in debt collection, we achieve high success rates. In addition, our empathetic approach triggers a high payment motivation, which at the same time maintains the customer relationship.
The entire dunning process, up to and including judicial collection, is carried out much more efficiently with our debt collection services and, in an emergency, can secure capital that was already thought lost – in long-term monitoring for up to 30 years. Because if a customer is currently unable to pay, this can quickly change again in the future. We stay on the ball for you.
Please contact us and don’t give away any earned capital due to non-paying customers. We will find the right collection model for you.
Tip 3 against non-payment: No blind trust
For large orders, find out in advance about your customers’ ability to pay. After all, you lend your customers money with every order produced/with every service rendered, until the incoming payment associated with the order arrives in your account.
Research through your personal networks, the Internet or professional associations and get a picture of your buyers. Credit agencies can also give you an assessment of your customers’ creditworthiness. If you are already a Eurincasso customer, we will of course also be happy to help you with any questions regarding your customers’ creditworthiness.
You can reduce the risk of default with a credit check, but you cannot prevent it completely. If you want additional protection, you should consider taking out trade credit insurance. The smaller the return and the higher the default rate, the more worthwhile it is.
In addition to the insurance premium, you should also pay attention to your deductible. In practice, however, it is currently becoming more and more difficult to take out commercial credit insurance at all or at affordable conditions due to the rising number of insolvencies.
Tip 4 against payment default: Factoring with delcredere assumption
If you sell your receivables to a factoring service provider as part of a full service factoring, you are insured against bad debt losses to a high percentage. In addition, you increase your liquidity, secure professional accounts receivable management as well as positive effects on your balance sheet, because the balance sheet total is reduced.
The freed-up liquidity can be used to repay expensive liabilities. This increases the equity ratio. However, in order to be able to use factoring, your company must meet certain requirements.
Learn more about factoring!
The out-of-court procedure must remain tightly organized – if you recognize that the other party is not interested in relenting, the way to the lawyer should be advanced as quickly as possible – again – time is money! If Eurincasso is already in charge of the file, we will of course also take care of passing it on to the lawyer and also of the further correspondence! You decide for yourself how much information you would like to receive on the progress of the debt collection case – in any case, our customer portal is available to you with plenty of options.
Contact us now