The Cost of Bad Debt to UK Firms Soars

British Firms are writing-off tens of thousands of pounds every year in bad debt due to customers not paying their bills, according to new research. Bad debt amongst larger firms has almost doubled, so they now face on average 88,000 worth of unpaid invoices every year at a 5% profit margin these losses would require additional sales s of 1.76 million to cover the shortfall. If the profit margin were 1%, then the turnover would need to increase by a staggering 8.8 million!

SMEs, on the other hand, write-off on average 14,000 in bad debt at a 5% profit margin they would have to drum up additional sales of 280,000, or 1.4 million with a 1% profit margin to make up for the loss.

The new Credit Management Research Centre (CMRC) report, produced by Leeds University Business School and sponsored by global credit insurer Atradius, found that more than one in five of all UK firms say bad debt is now a serious problem for them, with a third of all companies admitting that late payment is also a serious issue.

There is also increasing concern over bad debts from export customers, with one in five larger businesses seeing it as a serious problem, although this figure falls to 15% amongst the SME community. The CMRC survey found that late payment remains a serious problem for around a third of all British businesses.

Will Clark, Atradius Regional Director for UK & Ireland, NAFTA and Australasia, explains: It is no surprise that bad debt and late payment are growing problems for British firms, but the escalating impact this has on their bottom-line is significant.

Even for a relatively small bad debt of 14,000, the average business would have to increase their sales 20-fold to cover the debt. For a larger firm, needing extra business of 1.7m to make up for a debt of 88,000, such a loss could seriously cripple cash flow and possibly even push them into insolvency. The number of insolvencies in the UK is steadily rising, so firms must have systems in place to minimise the risk of bad debt, or they could become another business failure.

The key findings of the CMRC report are as follows (compared with 2003 findings):

Small Firms (less than 250 employees)

14,000 worth of debt written-off on average each year, up from p from 13,000

24% say domestic bad debt is a serious problem, an increase of 5%

15% say export bad debt is a serious problem, down 4%

38% say domestic late payment is a serious problem, up 4%

27% say overseas late payment is a serious problem, a fall of 1%

39% have to wait between 31 and 60 days after the due date to be paid, down 3%

Larger Firms (more than 250 employees)

88,000 worth of debt written-off on average every year, up from 46,000

21% say domestic bad debt is a serious problem, an increase of 5%
19% say export bad debt is a serious problem, up 7%

33% say domestic late payment is a serious problem, up 1%

34% say overseas late payment is a serious problem, an increase of 5%

32% have to wait between 31 and 60 days after the due date to be paid, up by 3%

Professor Nick Wilson, Director of the Credit Management Research Centre said: The CMRC research has shown an increase in bad debt problems in recent months that are in line with the rising trends in personal and corporate insolvencies.

The rising trend of bad debt and late payment is also spurring more businesses into taking pre-emptive measures to ensure they get paid, according to the CMRC report. For example, 58% of larger businesses use collections agents for domestic and overseas debts, a rise of 14%. Export debts are less of a problem for SMEs, yet 52% use domestic collections agencies, an increase of 10%.

Will Clark continues: More businesses are realising that a sale is only a sale once the debt has been collected. As we know, the impact of a bad debt or even late payment can be devastating, so firms are taking steps to nip these problems in the bud, relying on experts to help them collect what they are owed and reduce the danger of a bad debt.

An executive summary of the CMRC report is available to download from the Atradius website at www.atradius.co.uk/cmrc where you can also find out more information about the companys collections services, credit insurance and other credit management products and services. Alternatively contact Atradius on 0800 21 21 31 31.