Reducing Bad Debt Reserves with Proactive Credit Management

The reality of doing business is that, despite your best efforts, not every invoice you send out will get paid. That’s why companies set aside reserve funds to cover these bad debts. Although it’s a common practice, it’s a silent drain on your organization, reducing your reported income and locking away capital that could otherwise be reinvested into growth.

Unfortunately, bad debt is only going to grow. According to Creditsafe, business insolvencies have increased year-over-year, with late payments becoming the norm rather than the exception. At the same time, 42% of Finance leaders say that increasing bad debt write-offs are impacting their ability to forecast accurately.

The obvious solution is to improve your credit management practices so you reduce your risk of extending credit to customers that won’t pay their invoices. But too often, companies manage their credit risk reactively, using outdated scoring methods, inconsistent policies and time-consuming manual reviews. As a result, they err on the side of caution, overestimating risk and padding bad debt reserves “just in case.” This cautious approach might feel safe, but it quietly undermines growth by tying up capital that could be working harder elsewhere.

What’s a Finance team to do if they want to reduce their bad debt reserves? A proactive credit management approach powered by intelligent automation helps organizations shrink reserves and improve their creditworthiness decisions without jeopardizing customer relationships. Shifting from reactive to proactive isn’t just a process upgrade, it’s a smarter financial strategy.

Impacts of poor reactive risk management

Bad debt reserves serve the necessary purpose of protecting the business from potential write-offs. But they come at a cost. When companies set aside large amounts to cover doubtful accounts, it reduces net income and limits the capital available for investment.

This is especially true in volatile markets. As late payments rise, many organizations overestimate their risk exposure and respond by increasing reserves. In effect, bad debt becomes a self-fulfilling prophecy. Instead of addressing credit risk at the source, companies budget for failure.

Bad debt reserves should be a safeguard, not a strategy. Over-reserving is a hidden tax on your growth, weakening your balance sheet and masking the true potential of your receivables.

How to move from reactive to proactive credit management

Shifting from reactive to proactive credit management requires a change in mindset and tools. Instead of waiting for defaults to happen, Finance teams can prevent them by improving how they assess, monitor and engage with customers.

Proactive credit practices include:

• Smarter onboarding: Use external credit bureau data and internal ERP data to evaluate risk before extending credit. This helps reduce exposure before it starts.
• Continuous monitoring: Track changes in customer financial health over time, not just during initial assessments.
• Early intervention: Identify warning signs such as missed payments or changes in buying patterns and act before the situation escalates.

This approach not only reduces write-offs but also builds a more resilient accounts receivable (AR) process. By catching risk early, companies reduce surprises and minimize the need for large reserves.

How automating credit management processes helps reduce bad debts

Manual credit management processes are often too slow and fragmented to keep up with today’s volume and complexity. Finance teams can only review so many accounts manually, and static scoring models quickly become outdated.

Automation changes that. With credit management automation:

• Customer onboarding is digitized and standardized
• Credit bureau data is integrated in real time
• Internal credit scoring updates dynamically based on ERP activity
• Alerts are triggered when customer risk shifts
• Predictive analytics identify potential write-offs before they happen

Esker’s Credit Management solution makes all of this possible. Automation equips Finance teams with the insights to more quickly make confident decisions at scale.

Credit management automation benefits your high-value customers

Stricter credit policies may reduce risk, but they may also alienate valuable customers, an area where sales and credit teams are often at odds, That’s why you need to include customer-centric strategies in your proactive credit management approach. Automated tools can help you tailor credit terms to each customer’s risk profile, creating a more personalized experience. This builds transparency and trust while still enforcing smart controls.

Proactive credit management also facilitates early engagement. If an issue arises, you can reach out to the customer before it becomes a dispute — preserving the relationship and improving resolution rates.

To learn more about how automation helps you strike the right balance between protection and partnership, check out our blog post: Eliminating AR Headaches: The Rise of Automated Credit & Collections

Why reducing bad debt reserves matters

Reducing bad debt reserves isn’t just about accounting — it’s about unlocking capital and confidence:

• Freed capital: Smaller reserves mean more working capital available for strategic initiatives.
• Improved balance sheet: Stronger financials build investor and lender trust.
• Predictable cashflow: Less uncertainty around receivables leads to better planning and execution.

When AR teams move from reactive to proactive, reserves stop being a drag and start being a lever for growth.

Real-world impact of debt management automation: AAH Pharmaceuticals case study

As the UK’s largest pharmaceutical distributor, AAH Pharmaceuticals faced mounting delays in onboarding new customers due to spreadsheet-heavy, manual credit processes. The result? Frustrated sales teams, frequent credit application errors and regulatory compliance hurdles that slowed growth.

After implementing Esker Credit Management, the transformation was dramatic:

• Credit application processing time dropped by 83%
• £500,000 in cost savings achieved within 10 months
• Four credit team roles redeployed from manual data entry to proactive credit risk roles
• Customer complaints around onboarding virtually eliminated

“Esker has removed delays we didn’t even know existed,” said George Kerr, Senior Credit Manager. With automation, the team processes applications in just 2.5 days — a competitive edge that has boosted revenue and morale across departments.

Esker provided AAH with real-time visibility, automatic regulatory checks and easy-to-use dashboards that empowered the Finance, Sales and Customer Experience teams. As George put it, “Having one solution provider across the entire invoice-to-cash process is very important to us.”

Read the full AAG Pharmaceuticals case study here

How Esker helps Finance teams shrink bad debt reserves

Esker’s Credit Management solution empowers Finance leaders to implement smarter, scalable credit control policies that include: 

• Integrated credit data: centralized information from credit bureaus, open AR and ERP systems
• Automated onboarding & approvals: digitized credit applications and decisions based on risk
• Continuous monitoring: real-time alerts on blocked orders, overdue balances or risk shifts
• Customizable rules: automated approvals, reviews and order releases based on credit policy
• AI-powered insights: predictive scoring and dynamic analytics for detecting early risk indicators

With Esker, companies can reduce bad debt expense, improve creditworthiness evaluations and protect revenue, all while strengthening customer trust.