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Bad debts can chip away at the most profitable business, so it's surprising that so many finance directors have been unsuccessful in bringing these under control. Those organisations in a retail environment, managing consumer debt on a massive scale, are particularly challenged. As the nation's consumer debt scales new heights and the amounts owed by consumers continue to grow - and as critical new regulations come into force - this challenge can only become steeper.

For many organisations, it is not just that they have been too reactive in the way that they handle customer debt, but that they have a poor grasp of the scale of the problem in their own company and how this is affecting the business. The business Web portal www.bizhelp24.com provides a stark illustration of the high cost of bad debt, noting that £5,000 in bad debt can have the net effect of a loss of £25,000 in net profit, because of the cost of processing, servicing and writing off that debt. This figure doubtless understates the true nature of the problem, as it does not take into account the cost associated with the bad lending investment.

Given that consumer debt in the UK has now broken through the £1 trillion barrier, according to the Bank of England, the ability to keep tighter control over these debts is becoming an imperative. As interest rates rise, economists suggest that this could spell a national economic disaster.

Our own research has found that, in the retail banking industry, organisations can substantially reduce losses associated with bad debt write-offs - by double digit percentages each year - by taking a more proactive, pre-emptive approach to debt collections and recoveries.

Yet, too few organisations are in a position to benefit from these kinds of savings today because of the way that their processes are structured, the information available to key decision makers, and the lack of profile that debt management has within their business.

To turn the situation around, they need to acknowledge debt and arrears management as a business discipline in its own right, and give it the visibility, management focus and levels of investment it so badly needs. While enlightened organisations in the banking and financial service sector are already reaping the rewards of strong credit risk management disciplines, in other industries this function is still too often regarded as the poor relation.

Even among many of the institutions that are already making great strides in this area, there persists a belief that collections is a simple process - a case of sending a letter asking for payment whereupon the customer duly obliges, or throwing more staff and force at the problem. Yet this does not take into account today's savvy consumers, who now allow their own payment hierarchies and preferences to influence how they prioritise their bill and debt repayments.

What can organisations do to regain control of the situation?

With the right investment - in IT, process re-engineering and staff training - companies could be identifying arrears and address debts much earlier and more effectively in the payment lifecycle. This, in turn, could lead to the following benefits: 

• A reduction in the debts, especially substantial debts, being amassed by customers;
• A reduction in bad debt write-offs;
• Lower administrative costs associated with debt chasing (whether internal, by more efficiently engaging staff resources, or better allocating costs associated with using an external debt collections agency);
• More accurate bad debt provisioning;
• Improvement in customer satisfaction, as self-curing delinquencies receive a lighter touch from the creditor while consumers in arrears are reached while they still have more payment options at their disposal;
• Stronger customer relationships;
• A reduction in customer churn.