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Friday, May 10th, 2013 | The Cash Flow Group | No Comments


false profits in accounts receivable

I have observed many companies, (in my 31 years in the debt collection industry) being blindsided by the reality that they stand to take a substantial hit on what they were holding in their account’s receivables that were past due. In essence, they were counting on and believing in false profits. The all too common assumption is that as long as a customer is buying and my receivables are growing, we’re making money. The thinking seems to be that cutting a non-payer or very slow-payer off from more credit will, A – cause you to lose needed revenue, and/or, B – cause the customer to not pay you as they seek credit and services elsewhere. In other words, we want to believe that the customer will eventually pay, catch-up, etc. We certainly don’t want to believe we’re about to get screwed over with an unpaid receivable.

I have seen companies play this game of ‘roulette’ for a year and more allowing customers to receive their goods or service, all without paying, and all because of the mind-set that I mention above. Companies just hate to turn away revenue, and they just want to blindly believe, in spite of all the signs and statistics to the contrary, they’re eventually going to get paid. You know the story, ‘they know better’, ‘they know their customer’, constantly playing amateur psychologist, emotionally attached to the situation, because it’s money involved, and you know if there’s anything that can get us emotionally attached, it’s our money…

News Flash! All monies that are written off are pure profit dollars. All operational costs, salaries, taxes, etc. have already been paid. You might consider, in your particular business, how much in gross revenue needs to be regenerated just to cover what you had to write-off. For example, let’s say your ‘net profit’ is in the 12-15% range, and you just wrote-off a $10K bad debt. You would need to generate about $90K -$100K in new sales just to cover the loss of that write-off. Again, what you write-off are pure profit dollars.

I will give you 2 current examples from our portfolio of accounts; but believe me, I can give you many, many more!

Example #1: a small meat distributor, in this case selling to a small mom & pop store. Back in May 2011, the store bounced 5 checks totaling about $4k. A small payment was made in May toward one of the checks. In spite of this glaring warning sign that there were problems with their cash-flow, the distributor continued to deliver meat for the next 3 months, with no payment whatsoever. The last delivery was in August 2011, and then they finally stopped delivering. Now the distributor was owed $20K! But wait, it gets better. They tried for 1 ½ years to recover the debt from the store before finally placing the account with this agency in February of this year.

Example #2: a small produce wholesaler selling to a mom & pop retail produce store. In April of 2012 they received 3 NSF checks from the store totaling $6700. Nonetheless, without any recovery on the checks, they continued to provide produce to the store through September 2012. Now they were owed over $16K. They finally placed the account with us in January of this year. By that time the store had been taken over by another creditor, who subsequently closed the store, sold the assets and distributed the monies ‘proportionally’.
Our client received $400.

Unfortunately, both believed in ‘false profits’.

I cannot tell you the number of short-sighted business owners, controllers, credit managers, etc., that I’ve spoken to through the years that end up in this situation, often largely due to, (are you ready for this?) they don’t want to pay to have a collection agency do what they are ‘so good at’. I mean God forbid they cut-off a customer early and place with an agency they would have to pay 10-20% to. No, they’ll save their company money by continuing to ‘work with’ the customer, or try to recover on their own for a year, yada, yada..

If I’m sounding sarcastic, it’s because I’m trying to. When you have the advantage of seeing this happen to thousands of businesses for 31 years, I guess you get a little jaded to the same old worn-out, tunnel-vision, excuses coming from some of these credit execs and business owners.

Bottom line, write a credit policy and stick to it. The odds of greater recoveries and less write-offs will be well in your favor. Don’t put your hope in false profits!

Art W Schnitzer
The Cash Flow Group, Inc.

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The Cash Flow Group, Inc

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