One of the worst things that can happen in the construction business – in any business – is to get burned by a client that doesn’t pay. If you’ve been in business long enough, chances are that a client will end up stiffing you on a Project one day.
Obviously, writing off bad debt is a bitter pill to swallow. But the true loss of bad debt to a company is more than just the amount of the debt itself. In fact, it is much more.
According to Anytime Collect, companies in the US write-off an average of 4% of their accounts receivable every year. And write-offs don’t just happen during an economic downturn. Quite the opposite in fact – it is very common for companies to get overextended during a period of fast growth. This is especially true in the credit dependent construction industry where almost any measure of growth requires a significant amount of financing.
It is probably no surprise to anyone reading this that the construction industry operates on thin margins. In fact, net profit margins for the vast majority of the sectors in the construction industry hover in the single digits.
Everyone knows that low margins make it difficult for a company to recover from cases of non-payment
To illustrate how tight margins make bad debt even more expensive, Zlien has actual data on bad debt losses from 7 new Zlien customers. Each of these customers signed up with them in 2017, and each of them had recently written off a bad debt from a non-paying customer before they signed with Zlien. Zlien is not revealing their names, but everything else about them as shown on the table below is accurate (net profit margin is based on industry averages).