Effectively Collecting Receivables Is a Time Management Challenge
The Imperative for a Systematic Collection Process
Effective collections is the single most important factor for achieving reliable cash inflows. Customer payments for products and services provide the lifeblood of most companies, funding new inventory as well as investments in both people and process. Effective collections can also reduce bad debt losses by compensating for a liberal or weak Credit Control function.
Simply defined, collections is the process of contacting customers to secure payment for your invoices. For the most part collections deals with past due invoices — those not paid within established terms. The eternal challenge for collectors is that that there are typically more customers to be contacted than time and resources allow. The task is twofold:
Optimizing cash inflows (and avoiding bad debt) confined by the number of requests for payment that can be made within a specified time period.
Ensuring that Collection efforts involve a rigorous, efficient process to maximize the number of customers contacted effectively.
There is a lot of truth to the formula “Call early and call often,” which is commonly used to promote an effective Collections effort. For one thing, “Sooner is better than later” is absolutely true in a collection environment. Procrastination only makes a past due situation worse. The second part of the expression resonates as well because “More contact is better than less.” Maximizing the frequency of past due customer contacts will improve results. In reality, however, time and resources are limited, so you are likely to not be able to contact all past due accounts as soon or as frequently as you would like.
As with any other time management scenario, choices need to be made. The solution to the collections challenge therefore starts with Prioritization. Execution and Escalation then round out the three key elements of an effective and efficient Collection effort:
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The 3 Keys to Collections Performance Success
Prioritization involves specifying the order in which you will contact your past due customers, and the methods you will use to request payment. The key factors informing your prioritization scheme are:
The amount of the past due accounts receivable (AR)
The age of the past due AR (e.g, 15 days or 120 days?)
The financial strength (or credit rating) of the customer and the risk of not being paid in full
There are automated collection tools that will analyze your AR to produce a prioritized collection list. For companies with these applications, collection prioritization is a very quick process and allows you a high degree of sophistication with regard to choosing the factors that trigger an collection activity.
Lacking collection workflow automation, a listing of all customers ranked by the total AR each owes, along with past due aging buckets, is all you need to manually prioritize collections.
If you are just getting started working on a collections backlog, we recommend first going after customers with higher probabilities of default, followed by the customers with large amounts past due (to provide cash flow for your business).
In an ongoing Collections environment, you will have already contacted the high risk accounts, so your prioritization scheme should be as follows:
Accounts previously contacted that have failed to pay as promised. In fact, broken promises should be followed up the day after the payment was expected.
Any other scheduled follow up. Failing to follow-up is a waste of your initial collection effort. These should be done at least weekly.
All other balances from largest to smallest amount past due. Collections for this group can also be modified by the expected time to resolve the issue. For example, many calls will be “quick hits.” Others will involve complex billing or product and service issues requiring substantially more time. Accounts that have gone recently past due can also be contacted using an email template.
The bottom line is to devise a scheme that allows you to implement the coverage that will deliver the most funds to your bank. Editors Note: For more on collections prioritization check out “Prioritizing Your Collection Efforts.”
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Execution follows prioritization. Requests for payment can be made via phone call or email (don’t waste time sending faxes, which are less efficient). The idea is to make as many calls as possible, working down the list of past dues from largest to smallest.
Those you don’t call should be emailed. However, after sending a couple of emails to these accounts (typically 10 days to 2 weeks apart), you will need to schedule them for a follow-up call. Automation of the routine emails to the majority of your customers can be achieved easily in a number of ways.
Emails can also be used with larger dollar accounts (include an account statement or a listing of past due invoices) followed by a phone call a day or two after the email - this helps make your call more efficient.
First contact should be made after only a few days past due for large and/or risky customers and 7 to 14 days past due for all others, but first check your customers’ payment histories. For customers who habitually pay 5 days past due, don’t waste a contact until they are 10 or more days past due. When cash flow is critical, you may even want to reach out to key customer or high risk accounts about a week before payment is due. This can be via a courtesy email or “soft” call to inquire if everything on the invoice is accurate and will be paid when due.
Escalation defines the steps to be taken and their timing, to protect a company from losses from bad debt and further payment delays from customers. The steps become increasingly stronger and the intervals between steps become shorter, as receivables age. The timeline starts with routine collection follow up when amounts are a few days past due, progresses to order hold, ending in referral of the account to a collection agency/attorney.
It is most effective when the Escalation Protocols are agreed to by management and explained to all customer-facing personnel. This way everyone knows what actions will be taken with moderately to severely past due customers.
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When Is it Time to Automate Collections?
Collections are a critically important function for a company. As such, collection efforts should be executed with a well-defined, formal process and be adequately resourced and monitored.
Automation will help, of course, but it is not essential until your collection efforts become a burden. For most firms, that point won’t be reached until you have several hundred customers, though firms with high invoice volumes will benefit sooner rather than later.
Collection Workflow Automation Software typically achieves a positive return on investment within three to nine months. It also will typically deliver a 10-20 percent improvement in Days Sales Outstanding (DSO) within six months to a year. For more about the productivity drivers embedded in collection software, you should read “Is Automation Fueling Your Collection Efforts?”
These products were initially developed in the 1990s for companies with at least four or five people in their credit departments. Over time, new offerings became available for one or two person credit departments, and now there are solutions that are suitable for small businesses that may not even have a credit department.
Your Virtual Credit Manager stands ready to answer your credit and collection questions and help you accelerate your cash flow.
Final Thoughts and the 80/20 Rule
It is important to keep in mind that roughly 20 percent of your customers will account for 80 percent of your revenue. Because we recommend prioritizing collections by dollars past due, you will be giving these important customers the attention they deserve when they go past due.
The challenge is getting through all of the 80 percent of the customers that only account for 20 percent of your revenue, and even more specifically, the bottom half of this group. A simple solution is to move more quickly through the escalation phase. Begin credit holds on these accounts soon (no more than 15 days) after they go past due, and don’t release the order with just a promise — wait for the payment. Also, once you have emailed a couple of reminders, followed up with a call, and the followed up the call with an email confirming the details of the customer’s promise to pay, don’t hesitate to send a final demand letter as a precursor to placing the account with a collection agency or attorney should the customer break their promise to pay.
The point is, don’t waste your time on extended collection efforts with small, relatively inconsequential accounts. If a new customer can’t pay their initial small invoices in a reasonable amount of time, don’t hesitate to take away their credit terms and make them pay on a cash basis. It will save you a lot of effort in the future. Keep in mind, an effective collection process is all about putting your efforts where the money is.