Improving cashflow in the face of bad debt

With water retailers facing a mounting volume of deferred or unpaid bills from business customers, a focus on improving payment allocation can help them keep their cashflow healthy, argues Parseq’s Craig Naylor-Smith

Water retailers are facing a greater risk of bad debt from the non-household sector.

Their business customers are still reeling from the impact of Covid-19, which has caused many to defer, or not pay bills. Ofwat has stated that, based on available information, levels of bad debt across the market are likely to exceed the two per cent of total revenue threshold it believes a “prudent” retailer should have planned for.

Retailers have worked hard to support customers throughout successive lockdowns, and in turn received help from the regulator and market operator MOSL to bolster their liquidity – including measures such as vacancy flags on closed premises and the ability to defer wholesale charges.

But many of these protections have since been rolled back. Retailers now face a cashflow crunch as they balance their financial obligations to wholesalers with depressed cashflow and an ongoing responsibility to help customers in need.

Recognising the growing threat bad debt poses to the sector’s financial health, Ofwat has recently consulted on proposals to raise price caps and introduce new rules for sharing debt between retailers and non-household customers.

The regulator has stated that it intends for these measures to not take effect until April 2022, although further support to help recoup some working capital costs could be forthcoming in the summer.

In the meantime, it will be vital retailers do what they can now to improve their own cashflow position.

One, often overlooked, area that could be make a significant impact is payment allocation automation.

Allocating payments from customers is a fundamental part of the payment process. Ensuring the process is done as quickly and efficiently as possible is essential to healthy cashflow – particularly at a time where every payment counts.

While retailers have benefitted from applying technology to customer-facing functions, this focus on digitalisation hasn’t always been applied to the back-office.

Many firms continue to run large teams trying to manage significant payment volumes without sufficient technological backing, depending on manual processing instead. For smaller retailers, their technological hurdles are often compounded by stretched financial and human resources.

Manual processing ultimately increases the risk of human error. And where mistakes occur, it can lead to payments being misallocated or held in an ever-growing suspense account – ultimately depriving businesses of vital working capital and damaging their financial health.

Technology can help tackle the issue. Automating payment allocation systems can both speed up and increase the efficiency of the payment allocation process, and reduce the risk of mistakes.

Using the technology available from specialist suppliers can result in 95 per cent of payments reaching customer accounts on day one, with 99.9 per cent accuracy.

But the benefits don’t stop at cashflow – a focus on improving payment allocation can also help retailers continue to treat struggling customers with care.

Regular misallocation of payments ties up valuable time and money in tracing payments. It also puts strain on customer relationships by making customer interactions wrongly focused on following-up on what are thought to be outstanding payments, when in fact these payments have already been made.

Avoiding this will help retailers protect their reputation with customers. And, by leaving technology to do the repetitive, basic work in payment allocation, retailers can free up their team members’ time to focus on more complex tasks – such as working directly with customers to assess and understand their challenges and circumstances.

While retailers wait for the rule changes around bad debt recovery to take effect, they will be considering every measure to support their own financial position. As they do so, turning attention to the back office – specifically automation of payment allocation – will be valuable in improving cash flow and bolstering customer support.

The future for pandemic debt recovery remains uncertain. But by working proactively to reduce known risk now, businesses will be in the best possible position to weather whatever lies ahead.