How can bad debt impact your telecom business?

 By: Omar Abdul-Hafiz

 Vector created by pikisuperstar - Freepik

In telecom, as in any other business, bad debt can become a very dangerous matter if not dealt with in a systematic and effective fashion. The image gets even darker if we learn that some cases of bad debt may actually be cases of disguised fraud. In fact, according to statistics, about 5-20% of bad debt is, in essence, fraud. Furthermore, according to Gartner, research showed that bad debt has increased by 26% in 2020 alone amid the height of the COVID pandemic.

But what exactly does bad debt do to your business if left untreated? In this article, we will focus on 3 major effects bad debt can have on your telecom business.

Cash flow disruption

Seeing as cash is the blood through which any company lives and thrives, it is essential to maintain steady and growing cash flow so you can continue to work and grow. Naturally, failing to collect the dues of your clients is a surefire way to get your business in a situation of cash flow stagnation. This problem can be quite detrimental to your company’s ability to keep its day-to-day business processes running smoothly.

This situation can, in turn, severely impact your business’ ability to cover its different expenses, such as staff salaries and inventory and hinder the reconciliation of accounts receivables. Furthermore, it may eat a big chunk of your revenues, consequently damaging the profitability of your business.

Delayed investment plans

Lack of proper cash flow can have a cascading effect that may negatively impact many other aspects of your business. One such critical aspect is your investment plans. If you let bad debt mount and increase without taking serious steps to reduce it, the cash flow crunch it can produce may result in delaying much of the investments you were planning.

It goes without saying that investment is one of the main things any business does in order to grow and thrive. Without being able to follow through with investing on time, your chances of surviving in the market, let along growing, can be severely limited.

This is even more so in such a thriving market as telecommunications. Delaying your investment plans can also have a very dangerous impact on your ability to keep up with your competitors. While your competitors continue to invest in new products, services, or selling to more and more clients in the region and abroad, you will be left struggling with your basic finances in order to keep your business going. This is certainly a dire situation that you do not want to be in.

Sinking into insolvency

Okay, now this is where things get very serious. While this is an extreme scenario, you don’t want your bad debts to keep piling up and snowball to a point where it becomes an acceptable way to do business. In such case, you will not be able to pay your vendors’ dues or even your staff’s salaries. If your bad debt write-off cases continue to mount and increase with no effective solution in hand, this will likely lead your business into a spiral of death. Your budget will reach a point where it is suffering to cover your basic functional expenses. At some point, your business will simply fail to cover its basic expenses. In basic accounting terms, your reach insolvency, a situation where liabilities outnumber your assets.

In the situation of insolvency, your options for reviving your business become rather limited. That is, unless you take substantial steps in enhancing your debt collection strategy and start collecting your payments from your delinquent customers to avoid such a situation.

How to prevent all this

As you can see, bad debt can have a dangerous impact on the sustainability of your business. And the best way to avoid it is to establish a solid collection strategy from the very beginning. First, start by clearly understanding the different types of customers you have, their needs, economic backgrounds, and so on. Then, design your products and services to serve the needs of each separate group of your customers. More importantly, consider your pricing schemes and how they fit the financial circumstances of each category of your customers.

Another important thing to consider is how your CRM strategy helps in serving your collection strategy. In this regard, it pays to point out the importance of applying a resilient CRM and collections management systems a can greatly help ameliorate the risks of bad debt.

Check out what ESKADENIA Software offers to the telecom industry including ESKA Collections, a comprehensive collections management suite.