The Real Cost of Overdue Invoices: A CFO's Model for Debt Collection Software ROI

The four costs of overdue invoices

1. Carrying cost. Every dollar sitting in overdue receivables is a dollar you are financing, either from your own cash or from a facility. The formula: average daily credit sales x days paid late x cost of capital. Days paid late is simply your DSO minus your payment terms. If your terms are 30 days and your DSO is 52, customers are paying, on average, 22 days late.

2. Staff time. Follow-up emails, phone calls, reconciling promises to pay and chasing disputes all take hours that could go to analysis, forecasting or customer onboarding: hours per week x fully loaded hourly cost x working weeks.

3. Owner and executive time. Difficult or high-value accounts tend to escalate to the person with the most expensive time. This is a soft cost, and the model lets you set it to zero if you prefer a cash-only view.

4. Bad debt. Write-offs are the most visible cost and often the least connected to collection process. Invoices that are chased late or inconsistently are more likely to end up here. Check GST and tax treatment of write-offs with your accountant.

A fifth cost, damage to customer relationships, is real but hard to put a figure on, so it sits outside the model. We return to it below.

A worked example

The numbers below are illustrative and come from the example values pre-filled in the spreadsheet. They describe a hypothetical business, not a benchmark and not a Chasyr result.

The hypothetical business: $5 million a year in credit sales, 30-day terms, a DSO of 52 days, a 9% cost of capital, 12 staff hours a week on follow-up at $65 an hour, 2 executive hours a week valued at $150 an hour, 48 working weeks, and $40,000 a year in bad debt write-offs.

What debt collection software can change

Good automated debt collection software is designed to act on three levers. In the model each one is an assumption you set, because the honest answer to 'how much will it improve?' depends on your customers, your ledger and the product.

• Lower DSO. Consistent, well-timed follow-up shortens the average time to payment.
• Fewer hours spent chasing. Routine reminders, calls and commitment tracking are automated, and people handle the exceptions.
• Lower write-offs. Earlier and more consistent contact, plus structured payment plans, can convert some invoices that would otherwise be written off.

The scenario in the spreadsheet

Here is the scenario for the same hypothetical business. It assumes an 8-day DSO reduction, a 50% reduction in follow-up hours and a 25% reduction in write-offs. It also assumes a $12,000 annual software cost and $3,000 one-off implementation cost. Both cost figures are placeholders, since Chasyr has not announced pricing. Replace them with a real quote.

Why the interest saving is the weakest argument

There is also a one-off cash release of about $109,589 as DSO falls by 8 days. The model deliberately keeps it out of the ROI. It is a balance-sheet timing benefit that you receive once, and counting it as annual income would flatter the case. Only the financing saving on that cash is counted.

Look at the break-even line in the model. In this example, the interest saved on released cash would need a DSO reduction of about 9.7 days just to cover the $12,000 software cost by itself. The assumed reduction is 8 days, so the financing saving alone falls short. That is a useful discovery: a business case built purely on 'we'll collect faster and save interest' is fragile.

• Time. Staff and executive hours released for higher-value work.
• Write-offs. Even modest improvements can be material next to software cost.
• Predictability. A more consistent collections process makes cash forecasts more reliable.

Pressure-testing the numbers

The Sensitivity tab runs the net annual benefit across DSO reductions from 0 to 12 days and follow-up hour reductions from 0% to 75%. Use it to answer three questions.

1. 1.What is the downside? With zero improvement in DSO and hours, the example still saves $10,000 through the write-off assumption but loses $2,000 against the $12,000 cost. Knowing where the case turns negative is more valuable than knowing the upside.
2. 2.Which lever matters most? In the example, the time-saving lever moves the result far more than DSO does. Your business may differ.
3. 3.What must a vendor prove? Whatever improvement you assume, ask the vendor for evidence, ideally from a pilot on a slice of your own ledger.

The costs on the other side of the ledger

A simple pilot design: pick a defined set of overdue accounts, agree the metrics before you start (recovery rate, promise-to-pay kept rate, hours saved, disputes raised), and compare against a similar set handled the usual way. A fair model also includes what the software costs you beyond the subscription.

• Implementation and integration time with Xero, MYOB, QuickBooks or your ERP.
• Staff time to manage exceptions, since disputes and complex accounts still need people.
• Customer relationship risk. An aggressive tool can turn a late payer into a lost customer.
• Compliance obligations that remain yours regardless of the tool.

Presenting it to the board

Keep the pack to one page.

• Today's cost of overdue invoices, split into the four buckets.
• The scenario, with every assumption named and sourced.
• The downside case, from the Sensitivity tab.
• The pilot plan, including the metrics and the decision date.
• The one-off cash release, shown separately from recurring benefit.