Alert Message

NNN Charge accounts have outstanding balances greater than an average days sales. Is this a risk if they don't pay?

or
One Charge account has an outstanding balance XXX times greater than average days revenue. Is this a risk if they don't pay?

Severity

This is a HIGH severity problem for many environments

Explanation

Advisor calculated an average days turnover for your stores and then compared how many charge accounts had outstanding balances higher than this amount. This provides a rough proxy as to how much damage this account becoming a bad debt would be to your business.

High value accounts are potentially a risk to you if the account holder does not pay. Unfortunately these accounts are often your best customers so solving this issue may not be simple.

For example if your average days sales are $1000, and a charge account has an outstanding balance of $5000 and your gross margin is 50%, then it will take $ 5000 / ( $1000 * 50% ) = 10 days of trading to recover this debt should the account holder default.

Action to take

• Ensure that customer account is up to date and not behind on payments. Keep in mind that no matter how good your personal relationship is with your direct contacts at the business, when a business fails or is placed under some form of bankrupcy regime, your contacts will probably have zero influence over payment of your debt.
• For very high value accounts, do you have personal guarantees or other colateral should the account fail
• If you have a large amount at risk, talk to your accountant and seek professional advice. You may also like to consider various marketing and relationship options to manage the risk down without losing the customer totally.
• Would you be better to factor these accounts to remove credit risk? Factoring allows you to sell the debt to a debt agency at a discount, but typically moves the credit risk to the debt agency. Contact your accountant or financial advisor for advice.
• Can you shorten the billing periods? While monthly is the common billing frequency for accounts, your customers may not reject the idea of more frequent billing. While some customers will be using your credit as free working capital for their business, others may simply be using an account for ease of operation.
• If the account holder has negotiated reduced prices, in future consider offering the reduced prices only if the account does not fall into arrears. If you are offering discounted prices and allowing long credit terms you may be impacting your profitability more than you realise.