Having been through the post 9/11 advertising downturn with a Yellow Pages sales agency, I can attest that 2001 and 2002 saw a dramatic increase in bad debt and slow-paying customers. Some publishers in the U.S. went from 2 percent to 3 percent bad debt and slow-pay customers to 5 percent to 8 percent in the first six months after 9/11.

Since that time many publishers and local media companies have instituted a fairly aggressive pre-qualification requirement for advertisers as well as purging long-term problem accounts from the system to improve cash flow and aid the sales force in writing sales quotas. Many publishers went so far as to create special collections teams to get advertiser payments up to date and clear them to go into the next edition.

The real danger of increasing numbers of bad debt and slow-pay customers is they become a drag on the current sales campaign because their accounts must be brought up to date. In major markets, some sales campaigns began day one of sales with as much US$3 million in debt while still carrying a 3 percent to 4 percent objective. If a sales team has to make up US$3 million just to reach even, it is extremely difficult to then bring in enough increase and new revenue to make a 3 percent to 4 percent objective.

While post 9/11 was a difficult time with increasing bad debt and slow-pay, some publishers are saying the current economic situation has pushed the bad debt and slow-pay levels beyond 15 percent to 20 percent in some markets. Combined with general SMB reluctance to invest too much more in current marketing programs, increased levels of bad-debt and slow-pay advertising customers pose a serious threat to current earnings potential for many of the major publishers both in the U.S. and in Europe.  

A recent article in Bytestart.com, covering a new study conducted by Credit Management Research Centre (CMRC) produced by Leeds University Business School, reported that U.K. bad debt has more than doubled for both major companies and SMBs. The article points out that to replace this lost income requires Herculean efforts:

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 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 tendency of the sales force during down marketing investment periods is often to relax or “bend” some of their credit approval or due diligence procedures in order to put as much revenue into play as possible. The real danger in this approach is further loading on potential bad debt, slow pay and advertiser turnover well into 2009/2010, which would extend the current revenue challenges.

While it is often easier to sell with fewer restrictions, selling on value to advertisers that are good credit risks is a wise strategy that will position directory and local media companies for a successful (and shorter) recovery when the current economy improves.