www.fueloilnews.com | FUEL OIL NEWS | JUNE 2016 35
Other costs:
1) Cost of capital: what it costs you to float the money after you have made a delivery
but before you get paid.
a. This can vary widely by company, but we usually use 6.3% in our calculations
2) Percentage of bad debt expense: The percentage of your receivables that go into
collection and the associated costs.
a. We typically use .48%
On to the calculation:
For the example, we will use the following:
1) Average ticket price: $500
2) Payment Terms: Net 45 days
3) Labor rate: $33.58 (From US Bureau of Labor and Statistics)
4) Man hours: 3.3 minutes to fold stuff and send the bill and take care of everything
after the check comes back from the customer.
5) Printing and materials (envelope, statement, return envelope): $0.89
6) Postage: $0.35 for standard mail
7) Return Postage: $0.80 for business reply mail
8) Cost of capital: 6.3%
9) Bad debt expense: .48%
Calculating the cost of checks:
Cost of bad debt:
= Average Ticket Price x Bad debt expense percentage
= $500.00 x .0048 = $2.40
Cost of floating money:
= Average Ticket x (Cost of capital / 365 x Payment Terms)
= $500.00 x (.063 / 365 x 45) = $3.88
Labor costs:
= Labor rate x (man hours / 60)
= $33.58 x (3.3 / 60) = $1.85
Postage and Printing:
= Printing + postage + return postage
= $0.89 + $0.35 + $0.80 = $2.04
Total cost of accepting 1 check
= Cost of bad debt + Cost of floating money + Labor cost + Postage and Printing
= $2.40 + $3.88 + $1.85 + $2.04 = $10.16
There you have it. To accept a $500 check from a customer, it costs in this generic
example more than $10.00 or 2% of the entire bill.
Reach out to me if you have questions or want me to help do a deeper dive into what
a check is actually costing you.
l F O N
AVATAS Payment Solutions is a leading payment processing company for the energy
industry. Through its deep industry expertise and innovative technology, its customers
improve their cash flow and take advantage of cutting edge e-commerce solutions. Collin
Sullivan, certified payment consultant, is AVATAS's National Account Executive and can
be reached at 866.298.7836 or by email at info@avataspayments.com.
