When a company considers automating receivables, it usually compares two numbers, the price of the software and the value of overdue invoices. That comparison favors the manual process, because it leaves out most of the costs. Manual receivables create at least five kinds of cost, and only some of them show up in the income statement.
The cost of financing receivables
Every day customers take longer to pay is a day the company has to finance from its own money or a loan. The cost is easy to work out. Average receivables equal daily credit sales multiplied by DSO, the average number of days from invoice to payment. The cost of financing them is those receivables multiplied by your cost of capital, for example the interest rate on your line of credit.
Here is an example. A company invoices €15 million a year, about €41,000 a day. With a DSO of 60 days it carries roughly €2.5 million in receivables. Cutting DSO by 10 days frees about €410,000 in cash, which at a 10% cost of capital is worth about €41,000 a year. The analytics page explains how DSO is calculated.
The cost of your team’s time
Manual collections are made up of many small tasks. Someone prepares the overdue list, writes reminders, makes calls, notes replies, matches payments and checks with sales whether it is OK to press the customer. The work is spread across several people, so nobody sees all of it. Our customers’ experience varied. At Open Loyalty reminders took 30 to 60 minutes a day, while Tequipy, with more than 200 overdue invoices a month, got back more than 45 hours a week after automating.
To estimate this cost, multiply the hours per week by 52 weeks and by the hourly cost of the person doing it. At 10 hours a week and €40 an hour, that is more than €20,000 a year, and if a finance controller or the CEO handles the reminders, the figure is several times higher.
Then there is the cost of inconsistency. When the person who sends reminders is on vacation or busy with the month-end close, reminders stop and delays grow.
The cost of lawyers and escalation
When reminders fail, demand letters, law firms, debtor registers and courts come next. Each step costs money, and getting paid takes longer and longer. At Energetyczny Projekt, the whole manual process, including staff time, legal fees and registry subscriptions, used to cost PLN 5,000 to 10,000 a month. The earlier and more regularly a company reminds customers about payment, the fewer cases reach this stage.
The cost of invoices you can no longer recover
Some customers pay late because they are in serious financial trouble. The longer an invoice waits for the first call, the more likely it is that the customer goes bankrupt or stops answering before anyone gets in touch. Krzysiek Romaniak, the founder of Flowmore and co-founder of Energetyczny Projekt, lost part of about PLN 200,000 in overdue invoices this way, as he described in our post on what unpaid invoices taught him.
To estimate this cost, check how much the company wrote off as bad debt over the last two years and how long those invoices had been overdue before the write-off. If most of them went weeks without a single reminder, part of that amount could have been saved.
The cost of decisions you can’t make
The hardest thing to count is what a company doesn’t do because it lacks cash. It postpones an investment or a larger order, pays its own suppliers later and loses discounts, and turns to more expensive financing. Management spends its attention on payments instead of growth. This cost doesn’t appear in any report, and it is often the largest.
How to add it all up
Instead of comparing the price of software with the value of overdue invoices, add up the cost of financing receivables, the cost of your team’s time, spending on lawyers and registries, and your average yearly bad debt write-offs. Then compare that total with the cost of automation, taking into account how far DSO can realistically fall.
Sunbay takes over the repetitive part of this work, such as reminders before and after the due date, interest notes and demand letters, and it creates a task for your team when a case needs a conversation. It calculates DSO and receivables aging continuously from your accounting data, so the effect shows up in the numbers. You can read more on the analytics page.
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