This is part two of a two-part series. This article will cover the best practices to implement throughout your collections process to break the downward spiral of bad debt accumulation and eliminate the underlying causes of its occurrence. To gain the proper context of this article, please first view its companion piece "Past Due to Bad Debt: How to Segment Customers by Risk & Implement Collections Strategies that Match".
The Bad Debt Spiral
Bad debt is an ever-present issue that departments must face in their collection's efforts. Growing bad debt, however, is a sign that the strategies you are employing in your communication, customer relationship management and payment reconciliation efforts may not be effective enough to break a downward cycle.
Customer Relationship Management
Proactive Touchpoints
As covered in the companion article to this piece “Past Due to Bad Debt: How to Segment Customers by Risk & Implement Strategies that Match," proactive communication is key when aiming to reduce defaults and bad debt. Communicating with customers prior to signs of distress or default can help resolve misunderstandings and potential problem areas before they cause damage to your relationship. Issues that would normally go unnoticed or uncommunicated can be resolved quickly when there is an easy rapport between your team and its customer. However, communication alone won’t uncover every issue, that's why familiarizing your team with how an individual customer operates and communicates is as essential as proactive outreach.
Knowing how a customer likes to communicate helps build the trust that is crucial to resolving conflicts. Remembering that one customer likes to get straight to the point and doesn’t want to touch on unrelated topics while another enjoys speaking about personal matters prior to any business is the cornerstone of effective customer relations.
Effective customer communication can be pursued through many channels, but it is important to identify the type of communication your customer prefers to utilize. This will typically be the same channel they communicate with your company through, so keeping records of the type and number of incoming customer communications can help to provide more personalized and successful customer service. If in doubt, simply ask what their preferred method of communication is. These channels may include:
- Phone Calls
- SMS
- Customer Portals
- Physical Mail
This both acts as a strong differentiator in your customer service and produces healthier long-term customer relationships, reducing the likelihood that accounts become past-due. When a customer shows early warning signs or fluctuations in payment behavior, reacting fast and starting a dialogue early can mean the difference between an amicable payment resolution and bad debt. Offering mediating solutions early on, in an approachable and cooperative manner, can earn significant goodwill before a negative situation has time to develop.
Automation
Keeping up with the volume of customer touchpoints is a common struggle among accounts receivable departments—maintaining consistent proactive outreach often being an insurmountable task. The sheer volume of accounts can dilute the connection between your team and your customer, throwing up boundaries that negatively affect your business reputation and cash flow.
Automated messaging will be most effective in handling small-market, low-risk accounts that typically do not require close monitoring to fulfill invoices. This leaves your accounts receivable department free to pursue high-value and high-risk accounts with more focus and intent.
Automated systems can provide both a lifeline and immense growth opportunities for accounts receivable teams when implemented in their workflow. Collections automation software can lead to dramatically improved cash flow, customer experience, and a rapid decrease in the risk of bad debt accumulation.
Automation can also reduce a major source of late payments—miscommunication through human error. Customer communication that includes incorrect payment periods and due dates can lead to delayed payments and, even worse, disputes. These are the roots from which bad debt springs, so removing the possibility of human-induced error in your communications with customers can provide immidiate results in reducing past dues, and eventually bad debt.
Read to the end of this article to learn how automated systems can improve your collections process in more ways than customer outreach.
Payment Flexibility
Offering flexibility in your payment options significantly reduces the risk of bad debt while improving customer relations and cash flow.
Dispute Resolution
Another common cause of bad debt accumulation is the failure to effectively resolve disputes in a timely manner. Disputes can rupture business relationships and, depending on the size and value of the disputed goods, the rift can become permanent.
When managing disputes, ensuring that they do not become a burden on your receivables team is crucial for effective resolution. If managing disputes begins to overtake a larger and larger percentage of their time, it will inevitably take away from customer outreach and general resolution, causing a cyclical degradation of communication and collections effectiveness, leading to even more disputes and more degradation—a cycle which closely mimics the bad debt spiral.
Keeping accounts receivable teams unburdened by dispute management and customers satisfied with quality customer service is difficult to accomplish. Automated systems can contribute a lot to effective dispute tracking and remediation, especially when they are paired with a dedicated customer dispute resolution portal, providing a simple and effective way to consolidate and resolve disputes. Digital portals like these operate as a centralized platform where clear procedures, communication channels, tracking, documentation systems, and status updates give a clear picture of your current and past disputes.
Discounts
Offering discounts for early payments is a great way to induce better customer payment habits, but it can do more than that. Early payments support healthier cash flows, freeing up available cash for use in business expenditures and investements. The subsequent reduction in income from the discount is negligible when considering the time value of money and the opportunities available for reinvestment.
Early payment incentives may not directly reduce bad debt, as customers capable and willing to pay early are not typically delinquent. However, discounts on early payments can go a long way towards safeguarding your cash flow against delinquent accounts, and in doing so, they can decrease the negative effects of bad debt when it appears.
Payment Plans
Payment plans are a department’s last resort before involving third party collections agencies. Negotiating payment plans with delinquent accounts, although they are generally unenforceable, gives your business a chance to turn a certain loss into an potential settlement.
An added benefit of pursuing payment plans is that successfully negotiated and implemented payment plans can salvage an otherwise defunct business relationship. This helps customers who are in a rough patch but who otherwise have been able to meet their obligations, potentially preserving their continued business with your organization.
Unable to collect bad debt? Check out our podcast episode on debt recovery from the law offices of MAK.
Automated Systems—A Collections Upgrade
Reducing bad debt requires a comprehensive approach, combining risk assessment, proactive communication, and flexible payment options. Implementing automated systems in your collections procedures can provide enormous benefits to these processes and more, freeing up vast amounts of time and resources that would otherwise be tied down in repetitive tasks. Automating payment resolution, risk determination, and more empowers your team to provide unparalleled customer service where they are needed most.
Don’t automate with just any platform
Learn more about how Bectran can refocus your collections efforts.
Remember: The cost of preventing bad debt is always lower than the cost of collecting it. By implementing these best practices, you can significantly reduce your exposure to bad debt while improving overall business performance.
