Downloadable tools are available at the bottom of the page
Credit Management has two main objectives that complement each other:
The bad debt rate must remain permanently below 1%, ideally below 0.2%, although the definition of an acceptable rate depends on a company's profitability, industry and type of customer base. Otherwise, you must make significant progress in securing your business and in trade receivable collection management processes.
In order to have a fair indicator, it is necessary that the losses and provisions are taken in accordance with accounting rules and tax laws. Bad debts value must reflect the real situation of your receivables.
As proof, the increase in business failures is accompanied by an even greater increase in the failure of medium-sized and large companies. Some companies or public institutions are also in difficulty in countries considered to be rich. The USA, for example, is the country that generates the most public unpaid debts.
However, a significant portion of unpaid debts comes from companies in perfect financial health. Indeed, management and communication problems between customer and supplier accounts, disputes (the buyer probably has a good reason not to pay), actually constitute, by far, the leading cause of unpaid debts between professionals. The quality of the sales process, the implementation of Credit Management principles (risk assessment, securing and accelerating collections) and the digital tools to implement them are the essential elements to avoid non-payment.
The most important change lies in the evolution of the commercial culture and internal processes of companies that must integrate the risk aspects during commercial negotiation and the cash flow and recovery aspects as invoice due dates approach, by involving all the players in the commercial relationship towards this ultimate objective of obtaining payment of receivables.
- Accelerate cash receipts from customers with a professional collection process.
The DSO and the overdue invoices / accounts receivable ratio, or the collection efficiency rate are used to measure the performance in this key activity for any business.
This objective is materialized in the reduction of the Working Capital Requirement (determined from your company's balance sheet).
- Avoid customer defaults and preserve profitability.
This objective is particularly important as bad debts impact company's profitability and net result. The bad debts are materialized in the profit and loss statement (losses or provisions for doubtful debts) and in the balance sheet. Unpaid debt reduces the equity and therefore the net tangible worth of the company..
-
Reduce bad debts with My DSO Manager
The customer risk prevention and dispute / deductions management features as well as the cash collection module of My DSO Manager make it possible above all to avoid doubtful debts, and, where applicable, to identify invoices which cannot be recovered due to of the customer's insolvency or for any other reason.
A specific status and a comment are applied to the invoices concerned.
Then, you just need to do an extraction of items that are qualified with this status and / or based on other criteria to perform your bad debt review. See the demo.
Bad debts ratio is calculated as follows
Bad debts for the period*
+ Accruals for doubtful and old debts for the period
- Recovery of accruals for doubtful and old debts for the period
/ Turnover for the period.
* This period may correspond to a month, quarter or year depending on your company. It may stick to accounting and bad debts calculation periods of your business.
The bad debt rate must remain permanently below 1%, ideally below 0.2%, although the definition of an acceptable rate depends on a company's profitability, industry and type of customer base. Otherwise, you must make significant progress in securing your business and in trade receivable collection management processes. In order to have a fair indicator, it is necessary that the losses and provisions are taken in accordance with accounting rules and tax laws. Bad debts value must reflect the real situation of your receivables.Cultivate the culture of customer risk management
As a result of successive economic crises and the rapid transformation of the economy, the level of business failures and unpaid debts between professionals is particularly high. No company is immune to customer unpaid debts.As proof, the increase in business failures is accompanied by an even greater increase in the failure of medium-sized and large companies. Some companies or public institutions are also in difficulty in countries considered to be rich. The USA, for example, is the country that generates the most public unpaid debts.
However, a significant portion of unpaid debts comes from companies in perfect financial health. Indeed, management and communication problems between customer and supplier accounts, disputes (the buyer probably has a good reason not to pay), actually constitute, by far, the leading cause of unpaid debts between professionals. The quality of the sales process, the implementation of Credit Management principles (risk assessment, securing and accelerating collections) and the digital tools to implement them are the essential elements to avoid non-payment.
The most important change lies in the evolution of the commercial culture and internal processes of companies that must integrate the risk aspects during commercial negotiation and the cash flow and recovery aspects as invoice due dates approach, by involving all the players in the commercial relationship towards this ultimate objective of obtaining payment of receivables.
