What is the true cost of bad debt?
In reviewing the CFMA’s (Construction Financial Management Association) LinkedIn Group, I came across this comment:
The 2011 CFMA financial survey has gross margins for non-residential contractors at 7.5%. Our jobs are bidding at 3% fees, how does everyone get their gross margins up to 7.5%?
The question presented to the group here is important for all businesses: How to improve our margins? But this question also has implications on the flip side of the business: reducing bad debt and getting paid for the work that you bid and complete.
Let’s say that at the end of the year you have $50,000 of bad debt. At a 7.5% margin, your business is required to make more than $666,000 in revenue before making up for the $50,000 of lost cash. That’s an extraordinary burden on the business, and you can imagine how hard it is to recover from just a tiny bit of bad debt written off year after year.
Control Your Bad Debt with Lien Laws
How do businesses control their bad debt?
In the construction industry, businesses can claim the benefit of mechanics lien and bond claim laws, which are available in every state and on virtually every project to secure a company’s receivables. If the mechanics lien process is properly utilized, every account can be secured and you’ll get paid every time.
The downside to this promise is that the mechanics lien laws are complex, overly-technical, and a bit abrasive to the other parties on a project. Zlien can help a company manage all of these things.
If you’re going to be in Orlando for the CFMA 2012 Annual Conference June 25 – 26, please visit us in the Exhibit Hall at Booth 802 to learn more about how Zlien can help your business secure its receivables on every project.