Money depreciates
Debts depreciate in value over time
This simple concept is at the heart of debt recovery. As hopeful humans, we tend to forget that debts are not really worth their face value. We think of each customer’s entire account balance as a pending receivable; but in reality, some proportion of your billings will never be collected. If that number is 5%, then a bill of $100 is really only worth $95 – because every paid bill must also partly cover the ones that don’t don’t get paid. There is a point of diminishing returns, where you must consider: “Do I continue throwing good money after bad, or do I look at my other alternatives?”
It’s one thing to discount receivables to cover bad debts; but an even more important calculation considers receivables based on their age. Young receivables are very likely to be paid. Old ones are not, due to a number of related factors. An effective debt recovery strategy deals with debts as early as possible, before their effective value starts to depreciate.
Or here’s are two simpler ways to look at it:
- Receivables are not like fine wine…they do not get better with age.
- Receivables are like fish…they begin to smell in short order.
Why are older debts worth less? It’s common sense:
- Each customer only has so much money available to pay bills – especially for customers in financial difficulty. Available funds go to the most current and most urgent demands; old bills go at the bottom of the stack.
- An old bill has already been ignored for some time. Ignoring it didn’t yet create an emergency, so…what’s one more month? Besides, by letting this bill get old, the vendor (you) already gave tacit approval to delay even longer. (If you really wanted to get paid, you would have made more of a stink.)
- An old bill is for goods or services that were delivered long ago. The value has already been received and consumed. The customer is more motivated to pay bills that still feel like “quid pro quo” – something being bought and paid for today.
- Past due bills are embarrassing. People naturally want to avoid confrontation and disappointment. It often seems easier to procrastinate than to face up to an awkward financial discussion. Worse, since it is more comfortable to buy from a competitor, without any embarrassment or debt baggage, your customer is likely to go elsewhere. This risks even further delays in payment, and the outright loss of your customer.
The bottom line: The longer you wait to get paid, the less likely you will recover anything, and the more money you will waste on collection efforts.
