The Imperative for Prioritizing Collections
The Increasing Risk of Business Failures Demands Proactive Collection Measures
Companies are increasingly under duress, especially small and medium-sized businesses (SMBs). While profitability at the largest corporations has risen, it has been falling at firms with revenue below $1 billion. Roughly two-thirds of firms in this cohort are operating at breakeven or worse. While the Fed has finally loosened interest rates, the cost of commercial loans are expected to remain well above the levels experienced prior to the Covid pandemic. Furthermore, not only has the government stimulus ended, but many subsidized loans originated during that period are now coming due. With consumer discretionary spending bottled up by past inflation, it is no surprise many SMBs are struggling to make ends meet.
The American Bankruptcy Institute recently reported that, “The 6,067 total commercial chapter 11 bankruptcies filed during the first nine months of 2024 represented a 36 percent increase over the 4,561 filed during the same period in 2023.” That comes after a 61 percent increase over the same period from 2022 to 2023. In other words, commercial chapter 11 bankruptcies have doubled over the past 2 years, and the trend continues upward. The U.S. Department of Justice expects bankruptcy filings to double in the next three years, as indicated by its U.S. Trustee Program.
This forecast aligns with rising corporate bankruptcies, stricter bank loan standards, and increasing consumer debt and delinquencies. Over the next couple of years, many more companies are expected to file bankruptcy chapter 7 liquidations, or simply close their doors for good.
As a consequence, commercial accounts receivable (AR) portfolios are at an increasing risk of suffering bad debt losses. The immediate precursor to bad debts is increasing percentages of delinquent receivables, especially in the over 60 and 90 day aging categories. Commensurate with that, the Federal Reserve Bank of St. Louis, reports there has been an 18 percent increase in commercial loan delinquencies from the first half of 2023 to the same period in 2024. This initial uptick is only expected to get worse.
Full Speed Ahead for Collections
Effective collections management is key to maintaining healthy cash flow and minimizing overdue accounts, which will reduce your risk of bad debt losses. To achieve this, it's essential to have the right personnel, tools, and processes in place.
This article provides actionable strategies to strengthen your collections efforts, ensure company-wide alignment, and leverage credit hold policies to boost cash flow. From selecting and training the right team members to setting monthly targets and utilizing automation tools, each section outlines steps to improve the efficiency and success of your collections process. Additionally, implementing robust order hold procedures can serve as a powerful tool to incentivize timely payments from customers. Follow these best practices to create a more streamlined and proactive approach to collections, and ensure your business maintains a strong financial footing.
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To learn more about implementing a strategic collections process, join David Schmidt on October 16, 2024, at 1:30 PM EDT for a webinar on the subject
Do you need help assessing your customers’ credit risks? The experts at Your Virtual Credit Manager have default risk probabilities and other financial benchmarks for analyzing your AR portfolio and revealing actionable credit & collection insights.
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