The complete guide to managing and preventing bad debts in B2B

The complete guide to managing and preventing bad debts in B2B

There are three key drivers of growth in a business- product, sales, and cash collection; however, the third one rarely receives the attention it deserves. Businesses often focus on sales/marketing and product – while taking cash collection as a given. The success of many B2B companies depends on their ability to manage the receivables collection function efficiently. And this is a function that deserves more attention, investment, and, dare we say, credit than it usually gets.

When you sell a product or perform service on credit, you are also in the B2B accounts receivables collection business. The financial health of your company depends on how well your business can collect on sales. Unfortunately, it is often performed with inadequate forethought to the systems, staff, strategy, and tactics to deliver exceptional results. And businesses find that their customers are using them as a bank, with many overdue invoices impacting the cash flow and growth prospects of the company.

Here we will look at how it is possible to increase your company’s cash flow performance with better planning, execution, and technology

What causes bad debt issues for business?

Credit, or rather the lack of credit-risk strategies, can often lead to bad B2B business debts. The problems can intensify with the lack of efficient operating models and insufficient management focus.

Lack of credit risk strategies

Many businesses do not implement a robust framework for credit-risk assessment. They do not follow the global best practices that reduce customer delinquency and debt collection. Not accounting for credit risk can lead to unhealthy business growth. It expands the customer base but depresses the profitability.

Companies with a credit risk framework often do not monitor pre-delinquency or follow the same approach for each bad debt. These companies seem to follow the same settlement strategies for all delinquents instead of adopting a customized approach for each such customer.

Lack of specialized staff for debt collection

Most companies do not have a specialized debt collection team, and they mostly rely on external agencies for the same. Some outsource this job to call-center agents who lack proper training to assess a customer’s situation. These agents, thus, fail to provide the right settlement options to these customers.

When the responsibility for collections lies between multiple departments, it is difficult to establish clear ownership of credit risk. Often, such companies lack staff that specializes in credit and risk management.

Lack of management focus

Top executives seem to be more occupied by transformation, innovation, and digitization that accounts receivables & collection is usually not in the spotlight. Bad debt figures don’t often feature on the agenda, making it harder to improve the situation.

How does bad debt, when left unchecked, impact a business?

Bad debts are never good for a business. They affect company finances as well as the accounting process. Bad debts often complicate the accounting process making it difficult to comprehend when a sale was completed. Accounting for an unpaid sale requires a variety of collection and reporting procedures.

Preventing bad debts is essential not just for the company’s financial health but also to minimize reputation and relationship risks from the collection process.

How can one manage bad debts effectively?

Debt management is vital to a business as it ensures that the company has enough working capital to reinvest and grow. Effectively managing debt requires some thought and planning and can be controlled with these simple steps.

Implement a credit policy

Most businesses have an informal arrangement for supplying goods and services. Not having clear, written terms of trade can lead to several disputes creating bad debts.

B2B companies require a firm credit policy to ensure their continued growth. Before offering credit to new customers, companies should conduct a thorough credit history and business reference check. Document the terms of business and the credit limits, and initiate business only when your customers understand, accept, and sign the business terms. 

Implementing new payment terms and conditions is better done with new customers or those looking to extend their credit limit. Introducing new terms to existing customers could upset them and affect their loyalty.

Avoid pricing disputes

Customers are more likely to pay you on time when you provide them with the right information on documents and invoices. Disputes can create bad debts that can significantly impact the business.

All your documents- quotations, invoices, contracts, purchase orders, and estimates should refer to your terms and credit policy. Make sure that the invoices and financial statements clearly show the amount due and the due date. The company’s billing address and bank account details should also be present on such documents.

It is a good idea to check with the customer if they need any additional information to expedite the payment. Indicating collection charges for overdue accounts on your invoices and statements can discourage late payments.

Use credit management software solutions

Well-maintained information is the key to good debt management. There are many credit management software solutions available in the market that can ease your company’s debt management process. These software solutions can closely monitor your debtors’ ledger and keep track of the outstanding payments. These solutions also offer regular reporting to help identify trends and patterns before they can impact your business’ cash flow.

Provide multiple payment options

One of the simplest hacks for getting paid outstanding invoices paid quickly is to add a multitude of payment options (credit card, bank transfer, cheques) – from a ‘Pay Now’ button on your invoice to enabling debt financing solutions – where you customers can get the outstanding invoices financed and pay you while they manage the repayments. The simple philosophy is to provide no excuses for your customers to not pay you – something which we adopt here at ezyCollect as well.

Implement AR automation

Accounts Receivables automation modernizes the accounts receivables process through automatic, electronic systems that decrease repetitive and time-consuming tasks. It frees up time for your accounts receivables team to chase payment and get the cash in to mitigate bad debts, rather than wasting time on printing and posting invoices.

AR automation improves the accuracy of invoicing details, leaving little to no room for an excuse for late payments. The AR team gets more time to chase payments and handle exceptions making collections fast with less delinquency. 

Strengthen your delivery systems and implement the practice of keeping signed dockets as proof of delivery. When you automate the AR process, it becomes possible to send invoices ahead of time, discouraging customers from making late payments. It can also send automatic reminders when customers deviate from your trade terms.

Review credit limits of your customers

Review the credit limits of your customers regularly. Look out for warning signals which could indicate that they may be facing financial problems. Check on all customers, even the long-standing ones, to monitor changes in buying habits or an increasing level of debt.

Wherever possible, refrain from doing business only with one substantial customer. Customer concentration risks outweigh the benefits. Be careful of customers who are expanding rapidly as their business growth can sometimes affect their ability to pay. Do exercise caution when handling requests for extending credit.

Stop supplying to customers who do not pay their accounts on time. Initiate a discussion about the situation and try and reach a settlement for payment of past supplies.

Importance of onboarding new customers with comprehensive credit checks

The core of a sound onboarding practice is to ensure that potential clients can pay for your goods or services. Implementing complete business credit checks allows you to access a client’s payment history, giving you useful information about their ability to pay, now and in the future. When you know a client’s potential payment pattern, you can make an informed decision if and how you would like to conduct business with that customer. The existing process of getting trade references and having your customers and sales teams fill out forms isn’t the most effective one – you might consider investing in a service or resource that can complete comprehensive business credit checks for you rapidly and help you transact with the right customers for your business

When you have insight into how a potential client manages financial responsibilities, you can make amendments to your payment terms and credit limits. Customizing payment terms for different customers helps safeguard your business from unreliable clients and cuts down the risk of bad debts. For instance, if a credit check indicates that a potential customer is a payment risk, you may front-load the payment terms or not offer credit at all.

Credit checks can be invaluable to mitigating risks and protecting your business from potentially expensive mistakes.

In Summary

B2B businesses face several challenges when collecting outstanding payments from delinquent customers. Developing a well-structured process, leveraging digitization, and upgrading your teams’ resources and capabilities can maximize recoveries and prevent bad debts. With an increased focus on debt management, companies can reduce high costs and lost income and enhance customer focus, customer engagement, resilience, and profits.

New: Credit Insights to safeguard business against credit risk

New: Credit Insights to safeguard business against credit risk

Business has never felt riskier. The economic uncertainty delivered by COVID-19 has put question marks over everything business owners once took for granted: happy customers, regular sales, plans for growth.  Now, every business needs to safeguard the very foundation of its existence: cash flow.

ezyCollect is proud to announce its latest product, Credit Insights—your daily dose of debtor risk analysis, straight to your dashboard.

Key points

  • ezyCollect’s Credit Insights is designed to help you save your business from avoidable bad debts.

  • Up-to-date credit risk analysis on your entire debtor ledger uncovers priority risks as well as business growth opportunities.

  • Credit risk insights are available daily on your dashboard.

  • Credit Insights includes a live credit monitoring alert service.

Insights you can act on

Credit Insights is a unique collaboration between ezyCollect and credit reporting bureau, illion (formerly Dun and Bradstreet). Combining the rich data from both services, Credit Insights presents a comprehensive analysis of every debtor on your aged trial balance. Creditors will get aggregated data on the real-time failure risk and late payment risk of every eligible debtor so they can act early to protect cash flow.

Raj Kuckreja

ezyCollect’s co-founder, Raj Kuckreja, a chartered accountant, has first-hand experience trying to recover overdue debts from a failing business customer: “If you’re the last to know that a business is failing, you will be the last in line to get paid.

“To avoid bad debts, you need to know who you’re trading with. Then adjust your credit terms and communications based on your customer’s overall financial stability.”

During times of economic uncertainty, you should keep an even closer eye on your debtors so that you keep recovering your cash, advises Raj.

“You can’t mitigate risks to your cash flow without good insight.”

Raj Kuckreja

Click to Get Started with Credit Insights

Insights that makes sense for your business

Credit Insights combines a debtor’s ageing invoice data from your accounting software with their trade credit activity across the known market to assign every debtor a low-to-severe risk of causing credit loss to your business.

Your business.

This is where Credit Insights is designed to shine. The analysis considers how your debtors are trading with you and other businesses. While other debtor monitoring services will give you a generic risk assessment, Credit Insights gets personal.

That’s because credit Insights understands that your unique customer relationships generate payment behaviours that could buck the wider trend. For example, you’ll have customers that are paying you fast, while delaying their payments to others. Alternatively, you’ll want to know when your business is at the tail end of the payment queue.

Insights for better strategy

With insights like this, your business can ask: Are we a preferred supplier to this customer? Which debtors are likely to put our working capital at risk?

Many businesses will strategically pivot their debtor relationships based on credit risk insights. In fact, during ezyCollect’s testing phase for the new product, 95 percent of beta testers said they would consider changing their credit terms with high-risk customers.

Other risk control measures can include closely monitoring bad debt risks and escalating collection calls. As a proactive measure, your sales team can nurture low-risk payers for more business.

Insights that simplify credit risk management

Ricardo Hori

“Deeper data is always great, but the challenge is to interpret it in order to make relevant discoveries,” says ezyCollect’s Chief Technical Officer, Ricardo Hori. Business owners and financial controllers can lose a lot of time mining through data to find the gold. That’s why Ricardo and his team specifically designed Credit Insights to be easy to digest.

“I always want more data! But the data we give our customers has to be meaningful. Our customers want to make the best decisions for their business.”

Ricardo Hori

“Credit Insights take deep data, analyses it, and presents the assessment back to financial controllers and credit managers in a format that’s easy to understand. We want to empower them to act quickly based on evidence that directly applies to their business.”

The analysis assigns a debtor to a risk management group based on the debtor’s low-to-severe risk level. Financial controllers can quickly see the dollar value at risk in every group. Because the analysis is integrated into the ezyCollect accounts receivable platform, credit controllers get one-click access to activate ezyCollect’s ecosystem of risk reduction services: demand letters, credit reports and live credit alerts.

Credit Risk Groups on the Credit Insights Dashboard
Every eligible debtor from your accounting software is analysed and assigned a risk level

“The day-to-day job of the credit controller is quite complex, but if they can do all of their major tasks from one hub, their job efficiency and job satisfaction improves,” says Ricardo.

Top 5 features

Credit Insights is designed to give business owners and financial controllers greater visibility of credit risks and opportunities so they can take corrective action quickly:

  1. Auto-reads the aged trial balance from your accounting software, no manual upload required.

  2. Day-by-day credit risk insights straight to your dashboard.

  3. Receive live credit monitoring alerts for high-risk customers of your choice.

  4. Risk analysis includes risk control considerations.

  5. Credit risk report available on demand and delivered to your inbox fortnightly.

“It’s crucial that businesses stay on top of a rapidly changing trade environment,” says Raj Kuckreja. “There is more risk out there in the market, but there is also opportunity. 

“The key is being in the know.”

During COVID-19, businesses can trial ezyCollect’s Credit Insight’s service free for two months. Conditions apply.