UK household debts are at record levels. Our projections indicate the average UK household will owe close to £10,000 (USD15,000) in unsecured debt by the end of 2016. In cash terms this is more than ever before.
This will likely result in the continuing upward trend in unpaid debt for organisations that extend credit to consumers. Not only will this impact a company’s cash position, but it also means increased costs and a reduced ability to invest for the future.
Days sales outstanding and bad debt performance
Unpaid debt is being felt differently by telecoms companies compared to the energy and water utilities. Telecoms observed a slight deterioration in debtors, but a slight decrease in bad debt rates. Water companies have shown a broadly deteriorating position, whilst energy companies have shown variable collection performance, but a fairly steady bad debt position.
Telecoms companies tend to cut their losses early and sell debt; this impacts bad debt rates earlier. However, the nature of utilities debts means there can be a lag before bad debts are observed. There is generally a longer recovery process in utilities. Also, utilities companies tend to be better able to reduce their exposure to bad debts. Energy companies are able to recoup some losses through the installation of prepaid meters, while water companies have been able to offset some bad debtors to lower, vulnerable tariffs or bursary schemes.
So, with worse to come, will these sectors see deteriorating performance? The answer is yes, although for the reasons mentioned, the impact may be felt not only in days sales outstanding (DSO) and bad debt rates, but in other areas such as the utilisation of vulnerable tariffs or the number of customers on prepayment meters.
Times have changed. But have collection approaches managed to keep up? To some extent they have. There is far greater use of technology in the debt collection process and this will have contributed to the relatively stable collection performance in recent years. But collection strategy has not kept up. There is still a belief that sending more collection letters, and hitting customers quicker and harder will improve collection rates. The problem is that customers have different reasons for falling into arrears and different motives to pay their debts.
It is the company’s ability to recognise this, and tailor their collection strategies accordingly, which will ultimately make the difference. In short, collection strategies need to be dynamic and get on the debtor’s agenda. If we do this, we will put as much effort into ensuring that it is easier for customers to stay current as we do in the collection and recovery of arrears. Collection strategies will become more complex, but technology can help by enabling multiple automated billing, payment, collection and recovery paths for different types of customer. Whilst this may seem like it points to a more expensive billing and collection approach, this must be considered alongside the inevitable increase in the cost base due to increasing levels of non-payment.
- Analysis reveals a 60% rise in bad debt levels across the energy utility sector over the last five years with water utilities not far behind with an increase of 44%.
- According to the research, bad debt across energy utilities rose from £400m in 2011 to £640m in 2015 with UK water firms showing a similar trend from £263m to £379m. Only the telecom sector showed a marginal improvement with debt levels dropping by £20m to £560m over the same period.
- However, when DSO levels are analysed, all three utility areas saw a drop in performance levels. DSO levels for both telecoms and water utilities reached a five year record high in 2015: from 26 days of revenue in 2011 to 28 days for telecoms and an eight day uplift for water to a peak of 41 days. Energy utilities DSO levels have also risen from 27 days in 2011 to 32.
The original version of this article was published on the PwC Deal Talk blog and it has been reproduced with their permission.