Financial regulators in the U.S. are worried that inflation is feeding on itself. As we brace ourselves for more interest rate hikes, what are the implications for your business? Before we can answer this question, we need to look at the cumulative effect of the Fed’s latest actions to control spiraling costs.
At present, U.S. consumers owe more than $16 trillion to their creditors. Corporate debt exceeds $23 trillion. The Federal Reserve already boosted interest rates by another 75bps on November 2, with another 1.25% increase being expected by year-end. If half of this staggering debt load — over $50 trillion in all — carries variable interest rates, the annual interest expense increase will exceed $1 trillion, or equivalent to approximately 5% of the current U.S. GDP.
That’s an astounding amount of money moving out of the economy. We understand why the Fed is taking these actions but it’s crucial to open our eyes to what will likely happen next.
Whether you are a business serving other businesses or a provider of consumer goods and services, you can’t help but see the signs. Customers who were already overextended will struggle to meet their obligations in the coming months. This may be especially true for newer enterprises hit hard by the pandemic, but even well-established businesses may find it hard to satisfy their creditors.
Organizations tied to vulnerable sectors such as construction, property management, and real estate will definitely struggle, but the impact won’t be limited to a few narrow market segments. Soaring prices, scarce materials, and tightening credit affect all of us. Law firms, dental practices, and insurance brokers will have as much difficulty collecting from clients as home builders and mortgage underwriters.
With this in mind, what can financial and accounting professionals do to prevent serious collection issues as the end of Q4 approaches? There are moves you can make right now to strengthen receivables and prevent future issues relating to bad debt.
1. Review all receivables to pinpoint problem accounts. Which accounts are already paying late with significant unpaid balances? Which are showing signs of trouble based on activity over the last two to three months? Identifying the most serious collection issues will help your accounts receivable team focus its efforts on investigating and negotiating with these clients.
2. Radically retool collection procedures to put time on your side. When it comes to resolving bad debt, delays spell failure. Research from the Commercial Law League of America shows a seven-month-old invoice has a 50% chance of getting paid eventually. The odds drop to 25% at the one year mark. Balances that go unpaid for two years only stand a 12% chance of recovery. So starting immediately, your practice must be to reach out the moment an account goes past due.
The chances of collecting past-due amounts are much stronger if you take friendly yet decisive action at the 30 to 60 day mark than if you let accounts languish until 90 days have passed. Diversify your outreach strategy by using all possible channels — U.S. mail, email, text, live calls, and even social media.
3. Make sure your accounting and collections teams are well-staffed and prepared. You can’t expect your staff to step up collections efforts if they’re already struggling to keep up — or if you haven’t offered the clear procedures and training they need to be effective. Think now about staffing levels, CEU courses, and other measures that will help your team work at peak efficiency.
4. Refocus your sales and business development activities. In the past, offering favorable credit terms might have helped you rapidly expand its client base. Now the focus must be on increasing revenues from financially sound clients that can meet their obligations. Treat your sales team as partners in this shift, rewarding them for efforts that support strong sales results backed by healthy receivables.
5. Don’t wait to call in a collection professional. If you’ve never worked with a business collections expert before, you might not feel certain how to select one. Do your research now so you’ll be ready if this expertise is needed. As you accelerate and streamline in-house collection efforts, you’ll also want to set clear criteria for referring the toughest accounts to a professional.
The new economic realities should inform your business strategy for the coming year, and keeping receivables healthy is definitely part of the overall picture. Chances are you won’t be able to implement every one of these steps overnight, so commit to a progressive series of improvements that will help reduce the impact of bad debt on your bottom line.
Dean Kaplan is president of The Kaplan Group, a commercial collection agency.