Metric of the Month: Uncollectible Balances

If your organization is proud of maintaining a very low rate of uncollectibles, you may want to take a harder look at the books.
Perry D. WigginsJuly 5, 2018

More than half of organizations consider customers’ adherence to payment terms to be a key indicator of the credit function’s performance. But all too often, organizations take an unrealistically optimistic outlook on past-due receivables — even when deep down, they know that the likelihood of collecting payment on some invoices is very low.

For this month’s metric, we focus on total uncollectible balances as a percentage of revenue, as reported to APQC’s Customer Credit and Invoicing Open Standards Benchmarking survey.

The processes associated with this metric include managing and processing collections, including establishing policies for delinquent accounts, analyzing delinquent account balances, corresponding and negotiating with delinquent accounts, discussing account resolution with internal parties, and processing adjustments or writing off balances.

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At the best-performing organizations, uncollectible balances comprise just 0.58% or less of receivables. (See chart, below.) These are the top 25% of organizations, in terms of keeping uncollectibles to a minimum. At the opposite end of the spectrum are the bottom performers, or lowest 25%, which struggle to collect 1% or more of their receivable balances. At the median are the organizations that have 0.77% uncollectibles.

I know we all want to give customers the benefit of the doubt, but it’s important to honestly assess your organization’s overdue receivables. While it may help your customer if you are flexible and accommodating, it can hurt your business if you don’t accurately assess the likelihood that you will ever get paid.

Of course, there are sometimes good reasons to make exceptions and give customers a little extra time to pay. At my company, APQC, we have a general business rule that any receivable that goes unpaid for 150 days is converted to bad debt. However, we have been known to be flexible in certain instances, for large customers who have a consistent track record of on-time payment.

However, consistently making exceptions can artificially deflate uncollectible percentages, which can come back to haunt the company when it finally has to pay the piper and take on an inordinate amount of bad debt expense.

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While customers may have the best of intentions, verbal assurances that payment is on its way may never come to fruition. In these instances, many organizations take a proactive and holistic strategy towards collections, yet one that is professional and sensitive to the customer experience and the organization’s brand.

uncollectible balances chart

Start taking deposits. Requiring customers to place a deposit means they have “skin in the game,” making it less likely they will default. At the very least, you’ll already have partial payment in hand.

Give customers self-service information access. It also helps to give customers access to the tools they need to investigate and resolve any invoice issues on their own. According to APQC’s Open Standards Benchmarking data, most organizations — 73% — provide their customers with self-service mechanisms for issue research and resolution. Such portals or web sites help facilitate the customer experience and can speed up the time it takes to resolve any confusion or invoicing errors.

Use credit holds. According to APQC benchmarking data, about 91% of organizations use credit holds as collection leverage for customers late on their payments. With this tactic, it’s important to clearly outline when it is appropriate to put accounts on credit hold, and to keep all stakeholders informed about the hold status, including customers, sales, customer service, and shipping.

Dedicate time and training to collections. An understaffed, undertrained collections team can’t effectively track down outstanding balances, make calls, write letters, or work to resolve issues preventing payment. Extra training and dedicated collections personnel can improve your collections rate. Record-keeping is important, too: 27% of organizations manage a diary to prioritize and track collection activity, according to APQC data, and another 28% use third-party collection agencies for late-stage collections.

Offer early-pay discounts. A company will never have uncollectibles if it avoids extending credit in the first place. Many companies offer a discount for customers who pay up-front. Some even bring in a third-party lender to handle the financing, passing along the collections responsibility while getting paid in full.

Stratify accounts for collection based on specific criteria. APQC data show that 38% of organizations stratify accounts based on overall industry or region health or performance, while 20% stratify based on individual account materiality or state of arrears.

If your organization has tight control over its collections practices, chances are good that you’re also being realistic about what is uncollectible and writing it off at the right time. But if a sizable chunk of your overdue invoices are hanging in the balance, month after month, it’s time to take a look at whether it’s time to write that bad debt off and reset your collections operation for greater efficiency and effectiveness.

Perry D. Wiggins, CPA, is CFO, secretary, and treasurer for APQC, a nonprofit benchmarking and best practices research organization based in Houston, Texas.

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