Understanding the Opportunity Cost of Collecting Your Debts
No matter whether your business is landscaping or catering, collecting debts will always be part of the picture. But as crazy as it might sound, there are some occasions when chasing unpaid monies might not be to your advantage.
The concept is based on one from economics called “opportunity cost”. And if you, like some of us here, did not find economics the most enthralling subject at high school, there are still some useful things it can teach small businesses and medium sized enterprises.
But rather than bore you with dry theory, we’ve come up with some practical examples of how to approach your debt collection to maximise your benefit.
You have been contacted by a fundraising committee that has an annual fundraising drive before the Easter Show each year. You are a skilled baker, and the committee places an order for three multi tier cakes worth $80 each.
The total bill is for $240, and you typically bill between $800 and $1200 per week. The cakes take three hours to bake, decorate and deliver in total.
After the event, you are finding it difficult to contact the committee and have the bill paid. After several weeks you estimate that you have spent a total of three hours on the phone and writing emails chasing the client.
Because of that, you have not been able to fulfil an order of a similar size for another client. In this case, you would have been better off foregoing the debt and pursuing the new client. This is particularly the case because even if you get the bill paid, it is unlikely that you will get a follow up order any time soon.
In addition, even if you did renew the contract, it would only be worth around $200 – $300 each year.
You are a landscaper who has been contacted by a local bowls club to do the landscaping and garden maintenance on a monthly basis. The total monthly invoice is worth $200, with the prospect of second contract with a sister bowls club in the next suburb if things go well. Your typical weekly billing is around $1000.
After two months, you have not had bills for both months paid, even though you have been able to speak with the club treasurer several times.
In this scenario, it is greatly in your favour to pursue not just the outstanding money, but the ongoing contract. In fact, you have the opportunity to have an ongoing, high value contract, which means that it might even be in your interest to waive the fee for the first month if you can extract a promise for an ongoing contract.
It might sound steep, but the $200 that you forgo can be thought of as an investment or advertising expense to get the additional contract from the other club.
No matter what your business, it’s clear that you can keep learning to improve your results.
At ATP Tax we provide our clients with a range of advice to improve their businesses profitability and success. To learn more, we invite you to call us on 1300 829 484 during office hours, or email us anytime