History seems to be repeating itself lately.
Between January of 2006 and March of 2010, which covers the beginning of what has come to be known as the Great Recession, Chapter 7 consumer bankruptcies increased by 895% from 13,666 to 122,361. This coincided with a significant increase in unemployment, showing a clear connection between bankruptcy and unemployment.
As of April 1, 2020 and largely a result of the COVID-19 pandemic, unemployment has hit a record high and bankruptcies are already climbing, creating a ghastly mirror of what happened only 14 years ago.
Chapter 7 bankruptcies often wash away the majority of balances owed, leaving affected businesses to shoulder those losses on their own. In order to secure your business against the massive losses that come with increased bankruptcies, you need to recession-proof your accounts receivable management (ARM) practices.
Limit new credit exposure
Credit risk exposure is the maximum estimate of what can be lost if a customer defaults on the account. Since recessions increase the rate of unemployment and the rate of unemployment increases the number of Chapter 7 bankruptcies, limiting new credit exposure can be a vital part of protecting a business against loss.
This means opening fewer new accounts. Whether you do this by raising the standards on who is allowed to open an account, raising interest rates or any other means, the result must be the same: Keep credit exposure beneath annual income.
For example, if your company has an income of $200 million annually, your credit risk exposure should be – if possible – significantly below that.
Be firm yet polite with customers
The best way to lose money is to forsake your existing customers in the search for new ones. As the saying goes, “The perfect is the enemy of the good.” In concrete terms, finding new customers tends to cost five times as much as nurturing existing ones.
As customer spending decreases across the board and you lose customers when they lose their jobs, this fact becomes all the more important. Taking the necessary steps to keep existing customers (more leniency with remittance, longer grace periods, etc.) can prove vital in determining your company’s long-term success rate.
One helpful strategy is to turn the standard 30-day accounts receivable management cycle into a longer 120-day cycle. This gives you a greater look at the future’s projected income and helps give you a better picture of what to expect.
Upgrade your ARM processes
Artificial intelligence and machine learning are two great ways to reduce waste and cut down on non-essential spending during a recession. These technologies enable a significant reduction of labor hours alongside a boost in productivity.
For above-average producers, this provides a greater safety net. For marginal producers, this provides a life raft. Using advanced algorithms and software to manage your accounts receivable processes can result in less money being spent on wages and a greater return on investment for your accounting department.
Furthermore, adding evolving technologies like personalized SMS messages, email and other mobile-first solutions powered by AI can make these benefits even more attainable.
As the economic situation continues to develop, the key to success is information. Staying informed on current trends can make the difference between a difficult period of time and the total insolvency of your business.