22. September 2021

The true cost of bad debt 


Monika from Veita
Author and finance expert


The default of a major customer often becomes a question of existence for small and medium-sized enterprises. How can the risk of default be mitigated and the costs caused by late payment be reduced? 

The Corona crisis almost cost him and his ten employees their livelihood. One of his major customers in the chemical industry went into such a tailspin that it had to file for insolvency. The fatal consequence was the loss of receivables in a painful amount for the Upper Bavarian company boss. 

"This was very difficult for us to cope with, because as a small industrial company we only had a thin capital base, especially during the crisis," the entrepreneur looks back. 

What he learned from the crisis: On the one hand, he is now expanding his range of services, working to win many small and medium-sized companies as customers - and thus diversify risk. Secondly, he is redesigning his receivables management so that he can identify such risks more quickly and take countermeasures at an early stage. 

Long waiting times for large companies 

Many German companies are struggling with similar problems. Payment delays in Germany increased again in the 1st half of 2021. Outstanding receivables also increased, although suppliers and lenders shortened payment terms. This is shown by the current Zahlungsindikator report, which Creditreform Wirtschaftsforschung in Neuss publishes every six months. The experts fear that this could be a headwind for the incipient economic upswing. They analysed 3.9 million invoice documents from their debtor register. Thus, in the first half of 2021, the average payment delay in B2B business is 10.2 days. Customers from the chemicals and plastics, consumer goods, and transport and logistics sectors were particularly likely to be in arrears. As a result, the average days sales outstanding increased from 41.8 to 42.1 days. It is made up of the agreed payment term and the payment delay. 


In particular, late payments for business with large companies that employ more than 250 people continued to rise - to 9.2 days. This meant that suppliers had to plan for longer days sales outstanding: 44.2 days. Small and medium-sized companies with fewer than 250 employees also made their creditors wait longer for the money to arrive: for small businesses, the delay increased by 0.4 days to 12.1 days, while for medium-sized businesses it remained constant at around 10 days. However, at 38.9 and 37.1 days, their days sales outstanding were significantly lower than those of large companies, which nevertheless account for the lion's share - 62.3 percent - of the total volume of receivables. 

Consequences for small and medium-sized companies 

A look at Europe shows the consequences of this. Not only German companies are very concerned about the solvency of their debtors, but also 62 percent of European companies. The annual European Payment Report, published by Heppenheim-based Intrum Deutschland GmbH in June 2021, clearly shows that cash flow in particular remains the problem child for the majority of companies. Almost half point to their debtors' liquidity problems as the most likely obstacle to payments. And that's just now - after the Corona crisis. In Germany, the figure is 44 percent. 

As a result, late payments continue to thwart growth: "Although companies hope to achieve new growth in 2021, their ambitions are being undermined by the impact of late payments," is the alarming conclusion. More than a third of small and medium-sized enterprises (SMEs) complain about additional interest costs and lost sales. A quarter have to contend with liquidity bottlenecks - for 30 percent, this even threatens their very existence. At 36 percent, these hurdles prevent growth for both large and small and medium-sized companies. For SMEs in particular, this means fewer innovations (27 percent) and fewer jobs (31 percent). Well over a third of them are reacting with a hiring freeze; among large companies, the figure is almost half. 

High losses in the event of bad debt 

The following example shows even more clearly how much the delay hinders growth and what losses it causes. We have calculated it with the help of the VEITA bad debt calculator. Assuming a company currently generates sales of 2,000,000 euros and has a return on sales of three percent, this means a profit of 60,000 euros. However, if 1.5 percent of the receivables are lost, the profit is only 30,0000 euros. To compensate for this drop in profit via sales, the company would have to increase sales by 50 percent. The bad-debt ratio is set rather low here; for many companies, it is higher. 

Bad debt calculator

Calculate the cost of bad debt in different scenarios.

Sales revenue: € 2 Mio.

Return on sales: 3,00%

Profit: € 60.000

Bad debt: 1,50%

Reduced profit: € 30.000

Required additional turnover for compensation: € 1.000.000

Required increase in sales: 50%

© 2021 VEITA GmbH

These results may surprise some, but they should worry every owner. After all, the longer the delay in payment, the higher the default on receivables, the lower the profit. 

Counteracting with Veita 

It is usually much easier to reduce late payments and lower the bad debt rate than to increase profits. Veita offers the best prerequisites for this. What makes it special is that the intuitive, cloud-based software platform allows effective receivables management to be implemented quickly, with the focus on customer satisfaction. Veita rethinks order-to-cash processes and the entire receivables management as a customer-centric SaaS solution. 

"In this way, we help companies to avoid work in receivables management even before it arises and to improve customer satisfaction and their own liquidity at the same time," say the founders. 

With their software platform, they are revolutionizing outdated processes and setting new standards in customer communication and receivables management: "If companies in this country only get their invoices paid an average of 10 days after the agreed payment deadline, far too much energy is lost on managing outstanding receivables and there is a lack of funds to develop their own business." Veita is therefore the perfect way to counteract this. 

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