6 Strategies to Reduce Bad Debt & Write-Offs

When long-overdue invoices from B2B customers turn into bad debts, the consequences extend far beyond the accounts receivable (AR) department. Bad debts drain working capital, disrupt financial planning and threaten the long-term health of the business.

For Finance leaders, bad debt isn’t just a line item — it’s a flashing red light that something’s broken in the credit-to-cash process. Whether a high bad debt ratio stems from weak credit assessment, delayed collections or economic volatility, the end result is the same: lost revenue that could have fueled growth.

In this blog, we’ll break down what bad debt really is, where it comes from and what causes write-offs to accumulate. Then we’ll walk through six actionable strategies to help reduce bad debt and strengthen your bottom line.

What are bad debts & where do they come from?

A bad debts occurs when a customer fails to pay an outstanding invoice and the amount is deemed uncollectible. This usually happens after multiple failed collection attempts or when the customer declares insolvency.

To reduce bad debt, B2B businesses must understand what causes it. Some of the most common contributors of bad debts include:

• Poor credit assessment: Extending credit without thoroughly evaluating a customer’s financial health increases risk.
• Economic downturns: Volatile markets can lead to widespread financial strain across customer segments.
• Inefficient collections: Delayed follow-ups, inconsistent messaging or manual tracking often lead to overlooked overdue payments.
• Overreliance on key customers: If a major customer becomes insolvent, the impact is compounded.
• Ignored warning signs: Frequent short payments, disputed invoices or lack of communication often signal future write-offs.

Unpaid invoices are first recorded as accounts receivable. If they remain unpaid beyond a reasonable period, B2B businesses are often forced to write them off as bad debt, impacting both liquidity and profitability. While credit sales can increase competitiveness, they also expose businesses to financial risk if those customers cannot — or will not — pay on time.

The costs of writing off bad debts

Bad debt write-offs aren’t just accounting losses — they’re a direct hit to your company’s liquidity and growth potential.
Using APQC’s median bad debt ratio of 0.68%, a company with $5 billion in revenue would be looking at $325,000 in annual bad debt losses.

That’s real money — money that could lengthen your liquidity runway or fund product innovation, capital improvements or better customer experiences.

How to calculate bad debt ratio

The formula for calculating bad debt ratio is:

[Total value of uncollectable balances \ Total business entity revenue] x 100

Total value of uncollectable balances is the total value of balances that are delinquent and collectable with normal collections processes. Total business entity revenue is your overall revenue for your business. 

What is a “good“ bad debt ratio?

While a good bad debt ratio varies by business type, industry, and specifics of your collections process, benchmarking against yourself and close competitors can help you improve your bad debt ratio over time.

Generally, the lower your bad debt ratio, the better. In a recent Esker webinar, we polled attendees on their bad debt ratio for their business, and most responses hovered around the 1.6-3% range, with 1.5% being the industry standard.

Using AI automation tools like Esker allows your business to improve credit scoring and risk analysis, helping companies onboard creditworthy customers and reduce future write-offs, reducing your bad debt ratio for your business. 

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How to reduce bad debts for your business

Reducing bad debt entirely is nearly impossible. But with the right strategy, AR and finance teams can minimize it — all while freeing up more time for value-added activities. Here are six proven strategies to mitigate bad debt and write-offs, enhanced and supported by AI-driven automation:

1. Limit credit risk concentration

• The risk: Relying too heavily on a small group of high-volume customers puts your business at greater risk if any of them default.
• The strategy: Regularly monitor exposure by customer, industry and geography. Set internal thresholds for how much credit risk can be concentrated in any one area.
• How automation helps: Esker Credit Management offers real-time dashboards that visualize your exposure across segments — making it easier to catch unhealthy risk concentrations before they escalate.

2. Ongoing credit risk assessments

• The risk: A customer's creditworthiness can change quickly — especially in a volatile economy.
• The strategy: Conduct dynamic credit reviews, not just one-time checks. Incorporate financial statements, credit bureau data and internal payment history.
• How automation helps: Esker automates the credit application process, centralizes risk data and integrates third-party credit scores — ensuring you always have an up-to-date view of customer risk.

3. Strong credit controls

• The risk: Without clear policies, credit may be extended too freely, leading to higher bad debt risk.
• The strategy: Implement enforceable rules around credit limits, approval workflows and order blocking.
• How automation helps: Esker Credit Management digitizes and enforces credit policies across teams and geographies — reducing manual oversight and enabling faster, safer decision-making.

4. Credit risk prediction & management

• The risk: Historical data alone isn’t enough to predict late or non-payment.
• The strategy: Use predictive analytics to identify risky accounts earlier and prioritize them for follow-up.
• How automation helps: Esker Synergy AI — the set of AI technologies built into all Esker solutions — uses machine learning to forecast when invoices will be paid. This insight enables AR teams to act earlier and reduce days sales outstanding (DSO). One of the most critical early warning signs? A shift in payment behavior. If a customer who consistently pays on time starts drifting into late payments — even slightly — it could signal deeper financial trouble or internal disruption. Esker tracks these changes in behavior across time and flags them through risk-level classifications. This helps AR teams know when to tighten credit terms, escalate collections or reevaluate the account's creditworthiness before the situation worsens.

5. Electronic workflows

• The risk: Manual credit and collections processes are slow, error-prone and lack visibility.
• The strategy: Digitize every step of the credit-to-cash process to eliminate friction and improve response times.
• How automation helps: Esker’s platform centralizes customer onboarding, credit checks, collections and invoice delivery in one interface — with full ERP integration.

6. Proactive collections

• The risk: Collections are often reactive, starting only after a customer becomes severely overdue.
• The strategy: Develop tiered strategies by customer segment, automate routine follow-ups and prioritize high-risk accounts.
• How automation helps: Esker Collections Management enables personalized outreach strategies, bulk communications, and AI-based payment predictions to focus efforts where they’re needed most.

Bad debts are more than a finance headache — they’re a clear sign of preventable breakdowns in credit and collections processes. But with the right strategies and tools, Finance leaders can reduce write-offs, improve cashflow and strengthen financial resilience.

Whether it's through smarter credit policies, faster collections or predictive insights, the combination of strategy and automation can turn your AR operation from reactive to proactive.

Why Esker for collections automation?

Esker’s Accounts Receivable solution suite gives Finance teams a centralized, AI-powered platform for reducing bad debt, increasing visibility and aligning with modern CFO priorities. With seamless ERP integration, global compliance, and customizable credit and collections workflows, Esker empowers AR leaders to transform their operations from manual to modern.

Ready to take a proactive approach to credit and collections? Let’s talk!

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