When a company is growing, finance executives must continuously balance the benefits of doing new business with the associated risks. On average, one in every 10 invoices becomes delinquent. So each time a business grants credit to a customer, it is taking a chance that the debt will not be paid. Obviously, this creates risks for the business's cash flow and profitability, since one large unpaid invoice may have the potential to blow the bottom line, halt growth, or even trigger insolvency.
Representing up to 40 percent of the typical company's balance sheet, accounts receivable (A/R) are naturally both a vital and vulnerable component of a healthy business. Losses attributed to nonpayment of a trade debt are a regular occurrence, even as the United States continues its gradual economic recovery. In 2013 alone, nearly 40,000 North American companies declared bankruptcy, leaving their creditors holding the bag.
In the face of today's changing economic climate, recognizing and managing future A/R risks has become a priority for business leaders. Every business should have a well-defined and vetted strategy in place to mitigate the risk of bad-debt losses. This not only provides protection in the case of customer default, but it also ensures that a company is growing sales safely, domestically and abroad, to new and existing customers.
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