Strategies for Managing Unrecoverable Debts: Monthly Performance Indicator
In an ever-evolving business landscape, we can glean valuable lessons that bolster our financial resilience. The COVID-19 pandemic, for instance, underscored the importance of maintaining ample cash reserves. However, a critical yet often overlooked lesson pertains to the significance of cash flow management, particularly in the face of uncollectible balances.
In a report by APQC, it was found that uncollectible balances, or bad debt, made up 0.55% of revenue for organizations at the 25th percentile. At the 75th percentile, this figure rose to 0.81%. Although these percentages may seem insignificant, they can quickly accumulate, especially for larger companies. At $50 million in revenue, for example, a difference in uncollectible balances between the 75th and 25th percentile amounts to an additional $130,000. This discrepancy grows to $1.3 million at $500 million in revenue.
To avoid uncollectible balances spiraling out of control, APQC recommends three proactive measures:
- Internal Benchmarking: Beyond peer comparisons, it's essential to benchmark your company's data over time. This practice reveals the extent of bad debt and helps uncover patterns that inform better cash flow decisions.
- Revenue-to-Cash Ratio Analysis: Aim for this ratio to approach 1:1, which signifies a optimal cash flow. A variance could foreshadow uncollectible balances, prompting a closer investigation.
- Know Your Customers: Prior knowledge of a customer's industry trends and financial stability enables better predictions of potential payment hiccups, enabling you to adjust terms accordingly.
To bolster cash inflow, businesses can employ a host of strategies, such as investing in collections training, requiring upfront deposits, leveraging credit holds, offering early payment discounts, and establishing customer self-service portals.
While making adjustments to protect cash reserves, it's crucial to strike a balance between maintaining financial health and fostering strategic partnerships with valuable customers. A carefully calibrated approach can help you navigate the complexities of cash flow management in challenging business environments.
Perry D. Wiggins, a nonprofit benchmarking and best practices research organization based in Houston, Texas, serves as our website's secretary and treasurer.
In summary, regularly monitoring and benchmarking uncollectible balances is instrumental in maintaining healthy cash reserves and managing credit risk. Businesses that implement these practices effectively will be better equipped to navigate the ever-shifting business landscape with greater resilience and foresight.
- In the face of uncollectible balances, maintaining a revenue-to-cash ratio that approaches 1:1 can provide valuable insights into potential issues and help businesses make better cash flow decisions.
- Proactive measures like internal benchmarking, revenue-to-cash ratio analysis, and knowing one's customers are important in reducing uncollectible balances and ensuring optimal cash flow management.
- Strategy execution such as investing in collections training, requiring upfront deposits, leveraging credit holds, offering early payment discounts, and establishing customer self-service portals can help enhance cash inflow and financial resilience.
- It is essential for businesses to strike a balance between protecting cash reserves and fostering strategic partnerships with valuable customers for navigating the complexities of the business landscape, particularly in challenging economic conditions.
