I had a past client in the telecom industry that called me in to help on their bad debt situation.
They thought bad debts were running about 15%. However, after doing some tight analysis, I found the percentage was really 55%. However, the good news. Within one year, we had the number down to under 5% around the industry average, which was acceptable to them because they had an extremely high margin service.

So what were some of the things that helped lead to that huge decrease? What are some lessons that could be learned?

1. Know your bad debt percentage. In this case, the client was equating bad debts that related to prior periods with revenues from the current period. As a result, they were understating their bad debt percentage number. In order to get the right bad debt percentage, you need to trace back the bad debts that happen to the periods where they occurred.

2. Cut off known payers after a certain period. This client who would take a long time before somebody would get cut off from service. We put in controls to stop the service after 60 days of nonpayment.

3. Get credit score or other data on the new customer. We picked up credit scoring on new customers and we specified credit limits based upon what we found on those credit scores.

4. Convert weak credits to prepaid accounts. For the weaker credits, we converted them over to prepaid accounts and took them off open account balances.

5. Monitor your collection activity by period. We did a deeper analysis on our collections that went beyond the traditional accounts receivable aging. Instead what we looked at was what percent of receivables were being collected by period out of what was available to be collected. This allowed us to see where the soft spots were in some of our collection activity.

6. Predict your future collection. We then took it a step further and built a predictive model on future collections based upon the analysis we had done on the collection patterns. We set targets for improvement on the various collection rates, so that we could show what we would anticipate the overall improvement to be.

7. Hold people accountable to improvements in collection. We broke it down by territory and made people responsible within each particular territory for improvement on their territory’s collection rates.

Those are some of the major things we did to dramatically reduce the bad debts losses by over 90% in just one year's time. Consider implementing one or more of the above, and you might see an improvement in your bad debts as well. I doubt if you would need such a dramatic improvement, as this client did. However, I think you could still show some nice gains and free up more cash down to your bottom-line.

Jon Paul, MBA, CPA, CMC, CM&AA

President, Value Added Finance Resources
Bringing new insights on results and maximizing company value