In this period of inflation, customers are tightening their spending belts, which could result in them deprioritizing or losing their ability to pay owed balances. As such, organizations should keep a close eye on cash flow and be vigilant of early uncollectible balance warning signs.
Here are three proactive practices to ensure that uncollectable balances don’t spiral out of control.
1. Benchmark Uncollectable Balances Internally
While APQC frequently recommends benchmarking against peers and competitors, it’s also important to benchmark internally and track your company’s data over time. This strategic approach reveals the presence of bad debt and can help you discover patterns and trends, empowering you to make better cash flow decisions.
2. Benchmark Your Revenue-to-Cash Ratio
As you internally benchmark your uncollectable balances, you should also consider leading indicators like your revenue-to-cash ratio. Ideally, this ratio should be as close as possible to 1:1—If a company reports one million in sales for one month, it should also bring in the same amount (or close to it) in cash in the subsequent period. If the subsequent period’s cash collections are 80 percent of the prior month’s reported revenue, ask yourself where that gap is coming from. Today’s gap could very well signal tomorrow’s uncollectable balances.
3. Know Your Customers
A third way to stay on top of uncollectable balances is deceptively simple: Know your customers. A company that does will be well-positioned to know which customers will likely have challenges paying. For example, suppose your company sells parts to aircraft manufacturers, and you see the industry is in a downturn. In that case, you should know what’s likely to come and be ready to extend terms, write off that bad debt, or tighten your credit policies.
See how your uncollectable balances stack up against peers and learn strategies for bringing in cash in APQC’s Uncollectable Balances as a Percentage of Revenue.
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