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Introduction
One of the main reasons company debt can
get out of control is due to lack of time to debt collect. Small businesses need all the
time they have to market and sell their products just to keep afloat. That is where the
Parento method of debt collection comes in.
The Pareto Analysis
Towards the end of the l9th century an
Italian gentleman name Vilfredo Pareto began investigating the distribution of wealth. His
finding told him that the bulk of the wealth was held by the few and a small amount of
wealth was then distributed by the large majority of the population. This to most might
seem like common sense, but it became known as a Pareto distribution.
How this could work for
your business
You may now be wondering what this has to
do with the collection of debt within credit control. Well, if you look at the Parento
distribution within your own clientele band you will see a similar pattern. You may, for
example, may have a few very large customers and many small customers. In which case you
may find that 80% of your sales go to mere 20% of your customers. Perhaps if you were to
look at your profit you might see a similar pattern in that 15% of your products or
services would have produced 85% of your profits. So the Parento logic can be found in
other areas as well. Perhaps this can help to concentrate your sales in those areas by
conducting a Parento analysis.
These are just examples of the way in which
the Parento analysis works, but you can see how commonly a Pareto distribution is found in
industrial situations. In the credit control context it is perhaps better thought of as
the law of the 'significant few and the unimportant many' . For the business person who
is run off his or her feet trying to make ends meet in the world of industry and commerce
may find this approach a useful one to bear in mind. However is must be stressed that it
be disastrous to take this philosophy too far.
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Any small business which completely ignores
the small accounts altogether is heading for disaster, as these accounts soon mount up
into a sizeable sum and one which can be a nightmare to collect. Use this method wisely
and always pay attention to all accounts overdue or needing reminding. Using The Parento
Analysis
The best way to use this method of debt
collection is to divide your debtors list into three categories:
- Column (a) total the company with largest
debt and work down to the least
-
Column (b) The accumulative figure giving your overall debt at the bottom of this column
-
Column (c) Then number your debt, the top being number 1
Here's an example of a Parento distribution chart by "W Cowell and Sons".
Debt
|
Accumulative
Balance
|
Number
|
12,000
|
12,000
|
1
|
7,000
|
19,000
|
2
|
4,200
|
23,200
|
3
|
900
|
24,100
|
4
|
200
|
24,300
|
5
|
199
|
24,499
|
6
|
100
|
24,599
|
7
|
70
|
24,669
|
8
|
33
|
24,702
|
9
|
30
|
24,732 |
10 |
This is only an example and each company
will vary enormously in the amount of debt it might have accumulated. If we just glance at
the chart we can see that in the 10 accounts this particular company has 1 account which
owes 50% of the debt. If this number 1 account was targeted then 50 of the debt would be
eradicated. This is very simplistic, but it just gives an example as to how this method
can work in your own business. Now you have a simple analysis, work with this chart to get
a better perceptive of your debt. Categories this system.
Divide your Parento account numbers into
sections. In the example we showed there were 10 accounts if we divide these up into
category A, B, C we can see another picture to our debt in that over 90% of the debt is
owed by only 30% of the accounts. We will call them Category A debtors!!
If these 3 companies were to run into
financial difficulties this could be have quite a disastrous effect on such a small
business as "W Cowell & Sons".
Saving time is important for a small
business so it is important to organise you debt as much as possible to get the best
results in debt collection. The Parento method can be used in all forms of your business
life, so look at ways in which you might be able to exploit this method to get the best
results.
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