What is bad debt management? Definition, importance and strategies

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The term bad debt management is often used as a synonym for debt collection management . However, if we compare what each covers, we can see that bad debt management covers a broader field.

While debt collection management can be reduced to strategies for recovering money owed by customers, debt collection management also encompasses prevention and retention strategies. In this Moonflow post, the debt collection system , we talk more about debt collection, the default rate, and how to manage it.

What will you find in this text?

What is late payment?

What is the acceptable rate of delinquency?

How is the delinquency rate calculated?

Delinquency rate formula

Example of a delinquency rate

What is bad debt management?

Bad Debt Management: Why is it important?

Collection strategies to reduce late payments

1. Creation of clear credit and collection policies

2. Plan the follow-up of accounts receivable

3. Strategically plan the sending of payment reminders

4. Have trained personnel in charge of collections

5. Implement technology to improve delinquency management

6. Offer customers incentives for making early payments

What is late payment?
Let's start by understanding the definition of late payment. We talk buy uae email database late payment when we encounter clients who have not paid their invoices within the due date. For a client to be considered in arrears, it is necessary that when contracting the services or purchasing the products of a company on credit, they have signed a contract or binding document. This is because said document establishes the clauses of the credit, as well as the dates or date of payment.

What is the acceptable rate of delinquency?
We cannot speak of an acceptable default rate that is the same for all companies, since it will depend on the business sector, the size of the company and its financial situation. However, what specialists recommend is that it be below 5%.

Having a low delinquency rate (such as 5% in the example) indicates that only a minimal percentage of the portfolio is late in its payments. Consequently, the company has greater liquidity to be able to meet its obligations with suppliers and employees. On the other hand, having a high delinquency rate indicates that a higher percentage of the portfolio does not meet its obligations. This can lead to the financial health of the organization being seriously affected.