A Gartner, Inc. analysis of 796 financial statements revealed that provisions and write-offs of bad debt increased from $9,750 million in 2019 to $12,262 million in 2020 — a 25.8% increase. The standard approach to determining receivables risk underestimates the risk of customer nonpayment because it fails to account for those who can pay but still won’t, according to Gartner, Inc.

“The typical way the finance department assesses receivables risk is to evaluate the financial health of their customers and attempt to identify those who cannot pay,” said Mallory Barg Bulman, director, research in the Gartner Finance practice. “The problem with that approach is that it misses the risk of customers who are financially able to pay but still do not.”

Underestimating the actual nonpayment risk can obscure finance leaders’ view of cash flow and acceptable credit risks, leading to missed investment opportunities, increased bad debt and heightened risk of bankruptcy.

“We’re still seeing heightened concerns from prepandemic levels because there is so much uncertainty about which businesses will survive after government support ends, and the long term impact of the pandemic on consumer behavior is also still largely unknown,” Barg Bulman said.

The current approach to assessing receivables risk, looking at a customer’s financial health, fails to spot some of the main reasons for nonpayment (see Figure 1).

Assess Customer Behavior
Gartner experts recommend that finance teams assess customer behavior to determine who will pay.

“Analyzing customer behavior can be challenging because of the sheer volume of customers, and a limited ability to collect information on customer behavior and use it to determine risk,” said Barg Bulman. “But it’s not an impossible task for finance leaders, and the benefits to understanding their company’s cash flow can be considerable.”

Gartner experts have three main pieces of advice on addressing the challenges inherent to customer behavior analysis:

1)    If the number of customers is overwhelming, reduce the number by shortlisting the clients who pose the greatest risk if they didn’t pay.

2)    If visibility into customer behavior is limited, establish a process for frontline collectors to document and escalate nonpayment reasons in real-time.

3)    If it’s not clear how to make the best use of the customer insights gathered, develop an internal scoring system to translate disparate customer insights into a unified view of receivables risk.

Gartner clients can read more in: Determining Receivables Risk in an Uncertain Environment.

Non clients can learn more here: Digital Future of Finance.

CFOs and finance leaders can participate in Gartner research and get complementary access by joining the Gartner Research Circle.

About the Gartner Finance Practice
The Gartner Finance practice helps senior finance executives meet their top priorities. Gartner offers a unique breadth and depth of content to support clients’ individual success and deliver on key initiatives that cut across finance functions to drive business impact. Learn more at https://www.gartner.com/en/finance/finance-leaders. Follow Gartner for Finance on LinkedIn and Twitter using #GartnerFinance to stay ahead of the latest expert insights and key trends shaping the Finance function.