4 Steps to Proactively Forecast Bad Debt During Volatility


Has COVID-19 changed how you forecast bad debt? Now more than ever, there is a lot of uncertainty and rapid change that needs to be accounted for. During these times, we can’t always rely on our previous methods for forecasting.

In order to stay proactive, now is the time to consult with your internal/external audit teams to assure you are all on the same page with expected changes. Below I’ve put together four steps you should consider when re-calculating your bad debt.

1) Have conversations with customers early

Partner with your sales and account management teams to assess customer health. Decide together who your top clients are and proactively reach out to them. Usually, the top accounts are those with the larger invoices - perhaps the top 20%. Prioritizing the larger invoices helps for larger cash inflows at a time for your business. Whereas, trying to connect with many customers with smaller invoices will take more time, for less of a return.

Be strategic with your outreach plan. Based on the conversations you and your team have, determine who is best fit to have these hard conservations with clients. And make sure roles and responsibilities are clear internally. This is not the time for confusion in your client communication strategies. If your customers are non-responsive after multiple attempts or don’t sound confident in their business and likeliness to pay, add to the reserve as you can assume they are at high risk.

2) Review usage reports of your product or service

Every company is looking for ways to decrease costs. Your customers are checking the immediate ROI of all their products and subscriptions to either cancel, delay, or pause.

Usage reports are key indicators of the health of your customers and whether they consider your product critical at this point in time. Consider comparing your product usage over the last 60 days compared to the previous 60 days as well as the number of users in the product during these time periods. If your customer has not used your services in even 30 days or if usage has drastically dropped off, this should be a red flag.

If you notice these risk trends proactively, you can then consider what may be a controllable or uncontrollable churn and how to approach each client conversation and re-forecasting activity. If you know a certain subset of clients have a high churn potential, plan for it so that your bottom line - and executives - aren’t shocked by this.

3) Add any payment plan to the reserve

Once you’ve worked with sales and account management to access client health, you may start to receive requests for change to payment plans. Be happy when your customers are proactive about setting this up with you, some money in is better than no response and no money. Determine the available amended payment plans based on what you hear from customers while also keeping in mind what’s best for your business. Finding that balance to satisfy both parties is key.

Any of your customers that would like to make changes to their payment plan, or are already on a payment plan, should be added to the reserve. It’s better to over-prepare in this way in order to have a stronger (and more realistic) cash runway throughout this crisis.

4) Assure your AR tool can "tag" invoices

Keeping track of who has paid and who hasn’t, as well as all the externalities in between, may seem like a daunting task. See if you can determine a few common statuses’ for client payment in order to categorize and forecast accurately. An example of this may be: pay by EOM, 30-day extension, 60-day extension, 90-day extension, unresponsive, unable to pay/defaulted.

Proper tagging within your AR system, especially for un-paid scenarios, will make a big difference in your reporting. You don't need 10 manual spreadsheets to report to management if you are able to accurately categorize and bucket clients with proper tagging. If you are able to outline which tagging equates to at-risk customers at a glance and add to your reserve accordingly. Knowing the reasons for payment delay will not only help you accurately forecast but will show leadership clear reasons for your processes.

Tabs on customer health will improve business health

Customer health is directly reflective of your business health. Spending time early and often with your customers to understand their needs will help them feel more comfortable and give you a more accurate view of bad debt and its effect on the bottom line. A robust and flexible AR tool can make all the difference when it comes to your time spent and the accuracy of your reporting. With proper categorization and tagging, you can feel confident in your reserve and maintain financial health.