Defaults can hurt a company in countless ways, but the loss of revenue and liquidity is one of the biggest. Learn how to protect yourself against them!
The number of people in default in Brazil is staggering, and it puts on alert every business owner and manager hoping to avoid missed payments. According to data from Serasa, 72.54 million Brazilians are in debt.
Although the report indicates a slowdown in defaults in May 2024 (a drop of about -1.20%, or 884 thousand people), it is important for companies to keep seeking ways to protect themselves against defaults by their customers and suppliers, so it does not end up affecting their own cash flow and operations.
In today's article, we will look at all the risks that defaults can pose to a business, and which strategies we can apply to avoid them. Follow along!
But first, let's recall: what is default?
Default is a well-known term that refers to a person's inability to meet their financial obligations.
It usually happens due to:
- Lack of financial planning;
- Job loss;
- Economic crisis;
- Or even personal setbacks.
Because it is an external situation involving third parties (customers and consumers), the company has no power to step in and solve the problem completely. It is therefore up to the company to take the necessary actions to protect itself against these cases.
Risks of defaults for the company
Why should the company protect itself? — you may be asking yourself right now.
Here is our answer: because defaults bring a series of risks that, besides disrupting the company's day-to-day, can compromise and/or affect the sustainability of its finances.
The main risks include:
Loss of revenue and liquidity
Since defaulting customers cannot pay their debts, the company may stop getting paid for the sale of its products and services, causing its revenue to fall or take a direct hit.
And once revenue suffers that impact (and the company loses money), the company itself can slip into default if it lacks the financial resources available to handle payments to its own suppliers.
Impact on operations
Whatever the company's operating cycle, it depends on incoming funds to keep working and delivering its products or services.
So if many customers start defaulting, at some point the company may be unable to keep its cash flow healthy, and that instability may end up forcing it to cut costs and expenses, or postpone important investments that would help it scale.
Reputation damage
Defaults can also become a problem if the company is seeking investors or business partners.
That is because potential investors and partners may lose confidence in the owner's or manager's ability to solve the problem and get the delinquent customers in the portfolio back on track.
READ ALSO | Customer satisfaction in services: what it is and how to measure it
How to avoid defaults? 4 strategies to apply!
Knowing that defaults are a reality in Brazil and that they can directly impact the company's cash and operations (if there are delinquent customers in the portfolio), how do you protect yourself?
Our specialists here at Useall have selected 4 strategies that can help. Shall we take a look?
Credit analysis
Before granting credit, it is essential to analyze the customer's financial capacity.
To do so, we should check their credit history, income, and other debts that may strain their finances. We should also consider the ratio between the customer's income and debts, to ensure they will be able to afford any new obligations.
Payment policies
Company policies should be clear and include payment terms, consequences for late payments, and options for settling debts. For example, you can establish that all invoices must be paid within 30 calendar days, and that late payments will result in a 2% monthly penalty.
Offering discounts for early payments — such as 5% off for payments made within 10 days — is another worthwhile action that can encourage customers to pay their bills on time.
Monitoring
Monitoring payments is another strategy that helps us fight defaults, since we can quickly spot signs of late payments.
A tool that can make this tracking much easier is management software, since it allows you to monitor overdue invoices and send automatic reminders to customers.
For example, an email can be sent one week before the invoice due date, with an additional reminder on the due date itself. Then, if payment does not come through, we can make a phone call to understand the customer's situation and work out a solution before the debt becomes critical.
Credit restriction
If some accounts start falling behind, we can also notify the responsible agencies (CDL Nacional) and register the debtors' CPF (taxpayer ID) with them. This means the person will have restricted credit because of that debt and will be unable to use other services, such as obtaining credit or the possibility of negotiating, for example.
We can also adopt internal credit restriction policies, under which customers with a history of frequent defaults receive no additional credit until their outstanding issues are settled.
What did you think of these tips? Ready to adopt them?
If you enjoyed this content, keep following the Useall blog to stay on top of all the latest in management!
Originally published in Portuguese at useall.com.br.