Strategies to Manage Unrecoverable Debts: Monthly Measurement Highlight
In turbulent business landscapes, there's always a lesson to learn – if we're open-minded enough to catch them. Take the COVID-19 pandemic, for instance, it taught us that human connection is crucial, homeschooling isn't for everyone, and it's essential to have a stockpile of TP in your household. But there's one critical lesson we might've overlooked amid the swirling news of economic anxiety and bank failures: Cash is king!
Is your financial team staying competitive by boosting its cash reserves? By keeping a keen eye on your uncollectible balances, you can ensure your organization is on top of its cash flow game. APQC's Customer Credit and Invoicing Open Standards Benchmarking survey reveals that uncollectible balances—those payments owed that'll never see the light of day—represent 0.55% of revenue for companies at the 25th percentile, while for those at the 75th percentile, it's a hefty 0.81%.
That seemingly small chunk equates to $130,000 and a $1.3 million loss, respectively, for organizations managing $50 million and $500 million in revenue. That's some serious dough going down the drain!
Uncollectible Balance Red Flags
In distressing economic times like recessions or global pandemics, you can expect a rise in uncollectible balances industry-wide. But customers could default on payments for numerous reasons, and in a blink, tick up for you. Fortunately, there are ways to keep these balances under control:
1. Internal Benchmarking
While APQC encourages benchmarking against peers and competitors, it's equally important to monitor your own data trends. For instance, how do you compare to three months or a year ago in terms of uncollectible balances? Regular benchmarking provides insights on bad debt presence, uncovers patterns and trends, and helps with better fiscal decision-making.
2. Revenue-to-Cash Ratio
As you compare your uncollectible balances internally, pay heed to leading indicators such as the revenue-to-cash ratio. Aim for this ratio to be as close to 1:1 as possible. When a company reports a million in sales one month, they should ideally bring in the same amount (or close to it) in cash during the next monthly period. Gaps between the two figures can indicate an impending influx of uncollectible balances.
3. Know Your Customers
Staying in the know about your clients is simplistic but potent: A company that does is strategically positioned to spot high-risk customers likely to face payment issues. For instance, selling aviation parts to manufacturers in an industry downturn means anticipating turbulence and being prepared to provide extended terms, write off bad debt, or tighten credit policies if needed.
Pumping Cash into Your Register
If your uncollectible balances are higher than you'd prefer, fret not! You can adopt a slew of proactive, holistic strategies to remedy the situation:
- Train and empower your collections team to prioritize, collaborate with clients, and determine which accounts should receive priority treatment.
- Collect deposits upfront for invaluable insights into customer payment patterns, immediate cash for your enterprise, and protection against total loss (should payment remain uncollectible).
- Implement credit holds on delinquent accounts until they fulfil their payment obligations.
- Encourage early payment by offering discounts for timely settlement.
- Allow customers to resolve disputes online through specialized portals, speeding up collections and cash inflows.
While all these strategies should be on the table, tailor your approach to your most valuable and strategic clients, striking a balance between maintaining profitability and preserving client relationships.
Perry D. Wiggins, CPA, is our secretary, treasurer, and digital whisperer for APQC, a research powerhouse dedicated to benchmarking and best practices based in Houston, Texas.
Bonus Insights:
- Regular benchmarking and tracking of uncollectible balances help cash flow management, risk assessment, and accurate financial reporting.
- Warning signs of uncollectible balances include payment delays, irregular communication, high-risk credit scores, and inconsistent payment patterns.
- Strategies for managing uncollectible balances include proactive credit screening, early intervention, flexible payment terms, use of technology, and regular review of credit terms.
- In turbulent business landscapes, it's crucial for financial teams to boost cash reserves to stay competitive.
- Uncollectible balances can significantly impact an organization's revenue, with amounts up to $1.3 million lost for companies managing $500 million in revenue.
- Regular internal benchmarking can help identify trends in uncollectible balances, providing insights for better fiscal decision-making.
- Adopting strategies like collecting deposits upfront, implementing credit holds, and offering early payment discounts can help reduce uncollectible balances.
- Education and self-development in finance, such as understanding revenue-to-cash ratios and risk assessment, plays a crucial role in managing uncollectible balances and fostering personal growth.
