Why Accounts Receivable Should Be a Priority for Businesses in 2023: Three Core Reasons
As revenue rebounds in 2022, businesses still need to be wary of future uncertainties. This article argues why accounts receivable should be a priority in 2023 from three perspectives: rising default risks, high hidden costs of overdue receivables, and the importance of prompt collection in maintaining customer relationships, supported by quantitative data.
Congratulations to you and your organization for surviving one of the most turbulent periods in recent memory. Although many businesses and professional firms saw revenue rebound in 2022, the good news is still accompanied by a lingering concern that we are not yet out of the woods.
As you set your strategy for 2023, here are three key reasons why the health of your accounts receivable should be a top focus in the coming months.
1. Consumer and business default rates will rise over the next 12 months
The worst inflation in 40 years has prompted the Federal Reserve to take aggressive measures to bring down prices. Although the situation seems to be easing, the rising costs of goods, services, and money remain a triple threat to many businesses and consumers. Those who have long struggled to meet their debt obligations may sink deeper into debt in 2023.
You don't have a crystal ball to predict which customers will default, nor can you foresee the overall impact on your organization's cash flow and net profit. But taking the time to evaluate your existing receivables and tiering accounts by urgency will help minimize the impact on your bottom line.
2. The true cost of overdue receivables is far higher than you think
Unpaid invoices can severely erode cash flow, making it harder to meet your own obligations. But you may not have quantified the other costs of managing bad debt, such as full-time personnel costs related to collection activities, outsourcing fees, administrative expenses, system investments, and other hard costs.
Consider the time and effort required to develop collection policies and processes: analyzing overdue balances to decide which to write off and which to pursue, negotiating with angry and defensive debtors, and tracking the promises they make—and often fail to keep.
Even a slight increase in overdue receivables may force you to work longer hours, hire additional staff, or seek extra training to improve your team's collection skills. The growing workload will add stress for everyone—and when overwhelmed employees leave, it can blow your recruitment and training budget.
3. Quickly resolving overdue payments helps maintain positive relationships with customers and the community
When overdue payments remain unresolved for a long time, goodwill can evaporate quickly. Almost anyone who has tried to collect commercial or professional debt can tell a story of "losing it" with a stubborn, deceitful, or threatening customer.
But staying calm and objective is crucial. When faced with angry, defensive customers, your chances of collecting are greatly reduced. The digital world offers angry people multiple outlets to vent—often with devastating consequences.
It may seem unethical for someone who owes you money to criticize you online, but just ask any business owner who has tried to remove negative reviews to understand the damage it can do to their reputation. In most cases, they'll tell you they wish they had made an effort to listen, investigate, and seek a mutually satisfactory solution.
This doesn't mean you should roll over and accept writing off 100% of your overdue receivables. Successful negotiations begin with early action. At 90 days past due, your chance of collecting is about 70%; after six months, the odds drop to 52%; and after a year, the likelihood of resolution is only 23%.
Use this insight to prioritize overdue accounts that require immediate action. Keeping a close eye on accounts receivable in 2023 is a strategy that will pay off in multiple ways.