The default rate is an indicator that can help with financial organization and business management strategies. Find out how it works!
Default represents a delay in fulfilling the consumer’s financial obligations, and can occur in installment or post-paid sales, for example. Since late payment tends to affect the business’s financial management, it is important to monitor these occurrences — which can be done with the help of the default rate.
Through this financial indicator, you will have a complete overview of which customer payments are up to date and which are pending. This analysis also allows you to identify bottlenecks and find ways to prevent the index from reaching high levels in the company.
To understand these main points, see what the default rate is and find out how to keep your business situation under control!
What is the default rate and how does it work?
The default rate is an indicator that measures the level of late payments of a company. To standardize the measurement, it is common to calculate based on amounts that are overdue for more than 90 days.
The formula is given by the following equation:
Default rate = (Amounts in arrears / Total amounts receivable) x 100
Therefore, the greater the outstanding financial volume in relation to your company’s receivables, the greater the indicator’s measurement will be.
Although there are no minimum or maximum parameters, the ideal is to keep this rate as low as possible. After all, this means that most of the amounts owed by customers are up to date.
Why is it important to monitor this indicator?
Now that you know what the default rate means, it’s interesting to understand what makes it so relevant. In practice, the indicator allows you to check customers’ adherence to payment deadlines and identify the volume of delays, helping with financial management.
The index also allows you to optimize cash management, considering budget inflows and outflows. In addition, it is a way to identify threats that could lead to financial imbalance , such as an increase in the default rate.
Using this tool, it is possible to understand the company’s default scenario and which points need to be addressed to reverse the situation. This way, it is possible to improve the inflow of resources and favor business management.
How to avoid a high default rate?
So far, you have seen that calculating and monitoring customer default rates is essential for corporate financial management. However, in addition to measuring results, it is worth understanding how to act to improve them. To do this, you must learn how to avoid high default rates.
Below, see important tips to put into practice!
Develop a credit granting policy
One of the measures focused on preventing defaults includes developing and implementing a credit granting policy. It consists of a set of rules and criteria that define whether your company will allow credit sales to a given customer.
This policy may contain a complete credit analysis, for example. By searching for public information about the customer, it is possible to find out about their payment history (including any outstanding debts) and even their financial capacity.
From there, analyze the data to determine which consumers are at lower risk of defaulting. This way, you can make more credit available to those who are more likely to pay or deny the request to customers with higher risk, for example, in order to reduce the chances of defaulting.
Offer benefits for paying on time
Another tip to avoid late payments involves offering better conditions to those who pay their bills in advance. For example, you can offer a discount to those who make outstanding payments by a certain date, before the due date.
It’s worth analyzing which benefit makes the most sense for the type of customer and the conditions of your company. In general, this type of initiative rewards customers who pay their bills and helps create a culture of on-time payments.
Create a collection ruler
In situations where it is not possible to avoid default, it is essential to know how to effectively collect debts in order to recover credit. To do this, one of the most important tips is to develop a collection rule.
This is a tool that serves to establish a pattern of contact with customers in order to reverse default. In this scenario, you can determine after how long the delay should occur the first contact, for example.
Also, decide how often you should contact the customer and which channels you should use to contact them. This way, you can create repeatable processes that help you recover outstanding amounts.
Depending on the case, it may be interesting to include contact points before the delay and immediately after it occurs. This is what happens when sending an alert about a payment due the day before and on the agreed payment date.
If there is a delay, there is a chance that they will contact you on the first day of default. This is because a shorter time until collection can increase the chances of obtaining payment.
Use technology
To implement these strategies on defaulting on payments, it is essential to have a tool that helps you carry out the activities efficiently. In this case, using technology is especially important for the process.
With automated resources , for example, you can ensure that your default rate monitoring is accurate. This way, you will know exactly which customers are in arrears and will be able to direct collection contacts more efficiently.