4 tips on how to limit bad debt losses during COVID-19

Are your customers paying their bills on time?

As the COVID-19 pandemic continues to drive a slowdown in global economic growth, we are seeing an increase strain on cash flows. This in turn is leading to a deterioration in payment behaviour by customers. Here is some advice you can take to minimise the risk of bad debts and optimise your collections during the coronavirus pandemic.

Step 1:

Review your accounts receivable portofolio

It is important to identify the accounts that could encounter liquidity problems due to COVID-19. By assessing and categorising your portfolio, you can focus collections strategies on the accounts that need them most. To start, we would recommend grouping buyers into one of three tiers:

  • ‘Good’ for customers that are in a strong financial position and where COVID-19 has little or no negative impact on their sector;
  • ‘Fair’ for accounts where the pandemic has negatively affected their sectors, but the company is in a relatively good financial position;
  • ‘Poor’ for customers who are threatened with insolvency due to COVI9-19 and whose sectors have been deeply affected.

Step 2:

Consider renegotiating customer payment terms

As long as the new terms align with your company's credit policy, renegotiating with customers can increase the chance of payments being settled. For instance, you could consider giving customers incentives to encourage early payments as sometimes even small discounts can speed up the collection process during periods of economic hardship.

Another suggestion is to offer customers short-term relief – such as suspending interest and late fees – in exchange for prompt payments. Meanwhile, for customers that have severe cash flow issues which could prevent them for paying their bill in full, consider working out a plan to receive a partial payment in the short-term. This is preferable to writing-off the whole debt in the event the economic downturn worsens.

Step 3:

Streamline your accounts receivable process

While in normal economic conditions, minor shortcomings in your accounts receivable process may not be a problem, in the current environment, it is important to have an efficient system in place. Possible improvements include regular monitoring of key metrics so you can detect early any potential cash flow problems. Metrics to consider include accounts receivable turnover ratio, days sales outstanding and accounts receivable ageing.

It is also worth reviewing your company’s accounts receivable process to see if you need to make changes as a result of COVID-19. These could include the way invoices are sent and collected or how transactions are recorded. For example, are you offering payment options that make it easy for customers to settle their bills?

Importantly, while it is normal to make ad-hoc changes during this period, it is essential that customer data is kept up-to-date in a central repository to help prevent unauthorised changes. Having an accurate record of any special arrangements also allows your company to send invoices without errors, execute collections with the correct approach and manage disputes effectively.

Step 4:

Minimise disruptions to your collections operation

Depending on how the coronavirus pandemic has impacted your company’s working arrangements, staff may struggle to perform their normal collection activity. If your company finds itself in this situation, consider establishing a partnership with a collections agency to ensure you can still fulfil critical tasks. If you have a credit insurance policy, your policy may cover debt collections service. Please check with your credit insurance provider.

A collections partner can help you:

  • Adapt your collections approach to the development of the pandemic and changes in customers' circumstances;
  • Enhance internal efforts to collect outstanding payments;
  • Support the execution of your company's contingency plans to minimise cash flow risks.

Many businesses and sectors are feeling the strain from the COVID-19 outbreak making it more important than ever to safeguard your company’s liquidity. Ensuring your accounts receivable process is optimised to operate throughout the pandemic will help secure the cash flows needed to provide your company with the financial flexibility and resilience to survive the downturn.

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