A Gartner analysis of 796 financial statements reveals that provisions and write-offs of bad debt increased from $9,750-million in 2019 to $12,262-million in 2020 — a 25,8% increase. The standard approach to determining receivables risk underestimates the risk of customer nonpayment because it fails to account for those who can pay but still won’t, the research group says.
“The typical way the finance department assesses receivables risk is to evaluate the financial health of their customers and attempt to identify those who cannot pay,” says Mallory Barg Bulman, director, research in the Gartner Finance practice. “The problem with that approach is that it misses the risk of customers who are financially able to pay but still do not.”
Underestimating the actual nonpayment risk can obscure finance leaders’ view of cash flow and acceptable credit risks, leading to missed investment opportunities, increased bad debt and heightened risk of bankruptcy.
“We’re still seeing heightened concerns from pre-pandemic levels because there is so much uncertainty about which businesses will survive after government support ends, and the long-term impact of the pandemic on consumer behaviour is also still largely unknown,” Barg Bulman says.
The current approach to assessing receivables risk, looking at a customer’s financial health, fails to spot some of the main reasons for nonpayment.
Gartner experts recommend that finance teams assess customer behaviour to determine who will pay.
“Analysing customer behaviour can be challenging because of the sheer volume of customers and a limited ability to collect information on customer behaviour and use it to determine risk,” says Barg Bulman. “But it’s not an impossible task for finance leaders, and the benefits to understanding their company’s cash flow can be considerable.”
Gartner experts have three main pieces of advice on addressing the challenges inherent to customer behaviour analysis:
1) If the number of customers is overwhelming, reduce the number by shortlisting the clients who pose the greatest risk if they didn’t pay.
2) If visibility into customer behaviour is limited, establish a process for frontline collectors to document and escalate nonpayment reasons in realtime.
3) If it’s not clear how to make the best use of the customer insights gathered, develop an internal scoring system to translate disparate customer insights into a unified view of receivables risk.