3 tips from the CFO to curb a pandemic wave of bad debt: Gartner
- During the pandemic, provisions and bad debt write-offs increased, with a study by rresearch and consulting firm Gartner financial statements of 796 companies revealing an increase of 25.8% in 2020 compared to 2019.
By underestimating the risk of non-payment, a CFO may misperceive future cash flow and credit risk and miss investment opportunities, Gartner said, adding that the risk of bad debt and bankruptcy can also increase.
The risk of non-payment remains high even if the economy rebounds after the slowdown caused by the pandemic. “We are still seeing increased concerns over pre-pandemic levels as there is so much uncertainty about which companies will survive after government support ends, and the long-term impact of the pandemic on consumer behavior. is also still largely unknown, ”according to Mallory Barg Bulman, research director at Gartner Finance.
Despite record government assistance and monetary accommodations, Chapter 11 business bankruptcy filings rose 29% last year to 7,128, up from 5,518 in 2019 before the onset of COVID-19. according to Epiq data.
While stress from coronavirus lockdowns fueled much of the increase in bad debt, financially healthy customers who chose not to pay on time account for part of the increase, according to Gartner. The risk to be received is likely to persist after the pandemic subsides due to failures in service delivery or issues in checkout and other areas.
Yet many financial executives are following an incomplete method of assessing the risk of non-payment even as tensions from COVID-19 persist, according to Gartner.
“The typical way the finance department assesses debt risk is to assess the financial health of their customers and try to identify those who cannot pay,” said Barg Bulman. “The problem with this approach is that it misses the risk of customers who are financially able to pay but still don’t.”
Gartner suggests that CFOs reduce the risk of non-payment by taking three steps:
Identify the riskiest customers. If finance managers are unable to conduct a timely and in-depth review of a high number of clients, they should create a shortlist of clients with the most frequent abnormal behavior, such as a decreasing number of clients. paid bills or an increasing incidence of late payments.
Speed up notification. While obtaining information about customer behavior and prospects is limited, CFOs need to improve communication with debt collectors, sales representatives, and other staff who regularly interact with customers. They should also streamline the process of documenting and reporting non-payment reasons in real time.
Achieve precision. A CFO should make the most of the information gathered by creating a scoring system that provides a unified, detailed view of receivables risk across customers. A business can also adjust the credit it gives to a customer based on the timeliness of its past payments.
“Analyzing customer behavior can be difficult due to the sheer volume of customers and a limited ability to collect information on customer behavior and use it to determine risk,” said Barg Bulman. “But it’s not an impossible task for financial executives, and the benefits of understanding their company’s cash flow can be significant. “