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Five Ways to Reduce Bad Debt

It may be your most aggravating category of cost. You probably won't be able to eliminate bad debt, but keeping it under reasonable control is within your reach.

Myles Watling, CFO, The Phelps Group

Myles Watling, CFO, The Phelps Group

Many companies set aside hefty reserves, often as much as 10 percent of revenue, to mitigate against future bad debt. Some well-managed companies get away with about half that. We’re a Los Angeles-based integrated marketing communications company – with both advertising-agency and public-relations functions – and, after about 30 years and $100 million in revenues, we’ve experienced only $250,000 in bad debt, or about a quarter of 1 percent.

How did we do it, especially in a wild and crazy business like advertising and public relations? Following are five tips for reining in bad debt that we’d like to share with other companies.

Discount the Future, not the Past
When there’s a dispute over costs, and a discount is warranted and necessary, we offer a slight discount on future work, not on the completed project. While we try to accurately estimate the cost of a job, which in our business often comes down to time spent on it, there are often changes in the course of the work (to a website, for example) that result in overages. Even though we strive to accurately predict such changes, the creative process is what it is. But rather than reduce the cost of our actual, legitimate hours spent, we assume partial responsibility for the overage and proffer a discount on future work. That provides substantial good will to the relationship – and ensures another project.

Call Them on Late Pay
Regardless of the reason – and there’s always a reason – don’t let a client assume that late payments are OK with you. It’s a slippery slope that inevitably gets worse. It’s not just a matter of respect; it’s a reciprocal arrangement. How would they react if your product was late? Wouldn’t they mention it? Then why should their “product” – their payment – be even a day late?

We usually allow the first payment to be a bit late, as payment systems and procedures often need to be established. But allow your company’s self-esteem to shine through, and mention it. If the first two payments are late, it’s very much a red flag, and you’ll need to broach the subject of late-payment penalties. Often just the mention of those will improve behavior.

Also, in our advertising media buying practice, there’s a long-established policy of “sequential liability”: if we buy media for a client’s ad campaign, the medium is paid only after we receive payment from the advertiser client. If a client is late in paying us, the medium will bug us – but it’s not our fault. The medium will often alert us that it will contact the client directly for payment, which is as it should be. The client is thus bugged by two annoyed parties, which can be unpleasant. This can apply to any sequential supplier relationship.

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