Bad Debt Reduction

Opportunity

A telecom client had grown rapidly to over $100 million in sales in under two years.  The bad debt number unfortunately was growing rapidly as well.  With their revenue assurance department very busy managing the demands of this growth, they called us in to take a look at the situation and bring down the number. 

Action

The first challenge was to get our arms around the numbers.  There was no shortage of data, but it had to be pulled together in a meaningful way. We worked with the data warehouse to get the appropriate information pulled.  We then developed an initial reporting program in Excel using the VBA language to help clean up and organize the data.

We then compared our result against the estimates used in accounting to estimate the bad debts on broader numbers.  Since we now had the advantage of more detailed numbers, we came up with a tighter estimate, which turned out to be about 3 1/2 times the original calculations.

Next we helped the client take strong action on this number, while still preserving the customers and revenues where it made sense.  Processes were modified on both the front end (such as credit scoring, credit limits and prepaid plans) and back end (such as collections, temporary service cutoffs and other measures).

We also programmed additional reports that were put together in a monthly reporting package to track the progress by region, credit score and other factors.  In addition we developed a collection analysis that went well beyond the typical receivable aging.  What we captured showed how productive collection efforts were at each stage of the process.  This tool was also used to budget future bad debt levels and provide measurable targets for people to aim for and see how it translated to the overall bad debt numbers.

Result

At first it felt like backpedaling, finding out that bad debts were over 50% of sales instead of the 15% that had been estimated.  Fortunately, having a better idea of where it stood led to more decisive action.  With the people in revenue assurance, marketing and finance, we were able to cut the number by 90% to about 5% of sales, in line with their industry, in just one year.  The company made its first profits and a year later was able to be sold into a larger telecom firm.  This was done at a price over 30 times the low value of the stock and came around the peak of the telecom market.  Had this bad debt problem not been resolved as swiftly or as well, they would have missed the opportunity.  Another benefit- several top executives were able to retire early on a nice nest egg and the retirement accounts of the employees were in much better shape.  What had been a concern to the employees turned into a real joy.