Efficient business: Part 2
In this second part of our 'efficient business' series, we look at how to deal with bad debts and spreading your risk.
Dealing with bad debts
How many invoices did you have to write off last year? In general, expert witnesses have fairly low bad debt – most lawyers pay eventually! It is the often unconscionable amount of time it takes lawyers to pay that is the real cause for concern. In our 2009 survey of expert witnesses, close to 40% of the 500+ respondents had written off invoices in the previous 5 years. However, that accounted for fewer than 1,000 invoices in total.
Of course, prevention is better than cure. Knowing your customer and setting prudent credit limits based on your assessment of the risk they pose to your business is the order of the day.
- Watch out for warning signs such as broken promises (‘the cheque is in the post’), changes in openness (suddenly ‘Mr Smith isn’t available’) and silly queries about the report that appear to be merely delaying tactics.
- Beware those customers who constantly bump up against your agreed credit limit. Make a reasoned assessment about whether this is a warning bell or a sign that you need to raise their credit limit. A good payment record will be key to this decision.
- Be vigilant for late payers becoming bad debtors. Is it a case of can’t pay or won’t pay? Your attentive customer care will have alerted you to any problems with the report, so you should be able to spot ‘won’t pay’ fairly easily.
Depending on your financial position, you may decide that pro-actively suggesting a staged payment plan, or indeed part payment, is preferable to court action. In any event, ensure that the customer has the resources to pay you, otherwise suing them will be a waste of your time and money. For lots more information about this topic, read our Little Book on Expert Witness Fees.
Spread your risk
Many small businesses rely on a handful of customers and a limited range of services or products, and therein lies danger. Clearly expert witnesses have only one main service to offer, but they should work hard to avoid becoming dependent on a small number of customers as well. This is particularly relevant to medical doctors who use medical reporting organisations which have grown like topsy in recent years.
Spread your risk by:
- taking pro-active steps to broaden your customer base and get more firms instructing you
- making objective decisions about the amount of credit to be extended to each customer.
And don’t forget old Pareto and his principle. Vilfredo Pareto, an Italian economist, has been credited with developing the 80:20 rule. Look at your customers, rank them by the profit they generate and see what percentage of your customers brings in 80% of your profit. For many businesses something like 20% of customers account for 80% of profits. Is this true for your business? Perhaps more importantly, how quickly could you find out? And what does that tell you about your management information systems?
The most robust businesses will not obey the Pareto principle – they will have found a way to spread profitability across a wide customer base. So they are not overly reliant on a particular group of customers and are therefore less likely to be dragged down if one or two customers fail.
Finally, it is a commonly held belief that it costs up to five times more to win a new customer than to keep an existing one. So looking after your current clients is vital.
- Maintain strong productive lines of communication with your lawyers.
- Keep lawyers informed of progress and manage their expectations. It is better to promise the report in 12 weeks and deliver it in 9, than to promise it in 6 and deliver it in 7.
- Don’t store up surprisingly large invoices – nothing spoils a business relationship more quickly than the arrival of a large and unexpected bill!
Next time... effective use of IT and sources of further information.