AR Data Management, AR Automation, & Accelerating Cash Flow
The Best of Your Virtual Credit Manager from 2022
Editor’s Note: To start off the New Year, we’re bringing back three of the most popular YVCM articles from 2023. They all provide actionable content that can help you significantly boost AR performance. We’ve condensed the articles to save you time, but have also provided links to the originals should you want to take a deeper dive. We trust you will find these articles valuable and wish you a prosperous 2023.
Does You AR Portfolio Need Spring Cleaning?
Get Rid of AR Clutter to Improve Productivity and Cash Flow
March 29, 2022
Reorganizing storage spaces, disposing of all the junk you no longer use that has been taking up space, and getting rid of all the items in your wardrobe that no longer fit or are no longer fit to be worn in public, makes it “easier” to do things around your your home and enjoy life. Likewise, cleaning out the clutter that’s accumulated in your AR Ledger will make your AR portfolio “easier” to manage.
What’s Involved in “Cleaning” an AR Portfolio
In a perfect world, your AR Ledger would contain only whole, current invoices; or at least nothing seriously past due. Over time, AR Ledgers unfortunately tend to collect “Clutter.” This junk AR comes in a variety of forms, such as:
Short payment/deductions
Debit memos
Unapplied credit memos
Unapplied cash
Late payment fees and other surcharges
Early payment discounts taken but not deserved
Clutter obscures the true amount a customer owes and causes confusion. Similarly, clutter obscures your ability to clearly see a customer’s AR status as well as understand overall AR trends. Clutter can also cause new orders to be placed on a credit hold when it otherwise would have been automatically released. For the same reason, AR clutter can reduce the collateral value of your AR portfolio by causing current accounts to be excluded from the funding equation on an asset-backed loan or line of credit.
Please share this newsletter with your small business customers . . . it just might help them pay you sooner!
How to Clean Up Your AR Ledger
Launch a collection program to collect all past due invoices at least 15 days late.
Clear from your AR ledger as many of the clutter transactions as possible.
Match as many unapplied payments and unapplied credit memos to open invoices, deductions, and debit memos as possible.
Do not match unapplied credits with open deductions and debits unless there is documentation to relate them or you will be in violation of escheatment laws.
Write off the older, smaller deductions, debit memos, and even small invoices that will cost more to resolve than they are worth.
Refresh the credit risk ratings and credit limits of customers that have not been updated within the past two years. For more on the importance of periodic credit reviews, click here.
Update your customer master file.
Renew any expired sales contracts.
Benefits of a “Clean” AR Ledger
An AR portfolio that is less costly to manage
An AR portfolio that enables better identification and mitigation of credit risks
A better customer experience
A true representation of the value of your AR Asset
Better terms and higher thresholds from your lenders
In Summary…
An AR Portfolio Spring Cleaning is an excellent way to increase your effectiveness and efficiency when it comes to managing your AR portfolio. Over 90 day past due balances and other clutter simply get in the way of day to day credit and collection activities. While it is usually not a high profile problem, the impact of AR clutter will accumulate and grow over time, increasing the cost and reducing the effectiveness of your efforts. Periodically cleaning up your AR Ledger will deliver the benefits described above in a magnitude that may surprise you.
Email us to learn how the experts at Your Virtual Credit Manager can help you clean up your AR Ledger and increase cash flow by improving your Collection Process.
The Power of AR Automation
An Overview of Order-to-Cash Software Solutions
May 3, 2022
My first exposure to AR automation came in 1990 when I was credit manager at a mid-market, specialty metals manufacturer. The first month after we automated a few basic tasks to supplement our accounting package, we realized an increase in collections of 30 percent. During the 10 years I’d been in business credit, I had never seen anything like it, but was only the first illustration of the power of AR automation I would encounter.
Three things drove our 30 percent productivity gain:
Greater Visibility
Ease of Navigation
Greater AR Coverage
Necessity is the Mother of Invention
Fast forward five years and I encountered GetPaid Software (now part of FIS), a collection software package. They had a sporting goods client that was an early adopter. The client had been forced to layoff seven of their 16 credit department employees and were desperate to find a way to keep up with collections during their peak season and meet the aggressive DSO goals upper management had set.
The first month after GetPaid was implemented, July 1994, the client collected $7 million dollars more than anticipated. This included a 100 percent increase in past due collected. During 1995, DSO was reduced by an additional 10 percent, and bad-debt write-offs cut in half. For the full story, check out “Power Collecting: Automation for Effective Asset Management,” Piumelli and Schmidt (Wiley 1998), pages 11-14 & 129.
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Summary of AR Automation Tools
Collection Software solutions have become even more refined, whether they are designed for large enterprises or small businesses, but the basic benefits remain the same. Most first time users will enjoy a 10-15 percent reduction in DSO within 6-12 months, and returns on investment are typically realized in 3 to 9 months, making collection software one of the most impactful types of AR automation.
Automated Remittance Processing uses algorithms, Optical Character Recognition (OCR), Robotic Process Automation (RPA), Machine Learning (ML) or any combination of the above to match payments and the accompanying remittance advice to the AR Ledger. It’s the last 40 percent of matches that take the most time, so if your system can push the automatic match rate to 80 or 90 percent, you can realize a 50 percent labor reduction.
Electronic Invoice Presentment and Payment (EIPP) provides considerable cost savings by reducing the number of mailed invoices. In addition, studies have shown that earlier invoice delivery results in earlier payments. A third benefit derives from the customer self-service and communication features of an EIPP platform.
Here are the six other types of AR automation being implemented across the order-to-cash (O2C) spectrum:
Online Credit Applications: The best solutions provide approval workflow and automated reference checking.
Credit Analysis and Portfolio Monitoring Software: These solutions are for managing risk after the initial order has been approved.
Sales Tax Exemption Certificate Handling: The larger your AR portfolio and the more complicated you tax environment, the more beneficial these solutions.
UCC, Lien, and Bond Handling: As with sales tax, the challenge is in keeping up with each state’s rules. These solutions provide tickler systems and workflow so you can make sure all your filings are up-to-date.
Deduction and Dispute Modules: These are most often used in conjunction with collection and remittance processing solutions when there are high deduction volumes, such as with CPG companies.
Final Observations…
Compared to 25 years ago, AR software solutions are now being implemented more quickly and economically. Most solutions are hosted in the cloud, and so don’t have to be “installed” on your server. Most are also delivered on a Software-as-a-Service (SaaS) basis, which negates a large up front investment. Furthermore, there are now a host of PC desktop solutions that can be used facilitate AR management.
The bottom line is, you can now pay monthly or yearly, only for the modules you need. That enables you to facilitate the growth of your AR automation footprint in concert with your business growth.
Your Virtual Credit Manager can help streamline your Order-to-Cash process and implement policies, tools and technologies that accelerate collections and cash flows as well as maintain an appropriate risk/reward balance across your AR portfolio.
Key Drivers of Cash Flow
Are Your Collections Haphazard or Is There a Process in Place?
June 7, 2022
There are many reasons receivables under perform. One commonality is a process breakdown (or multiple breakdowns) somewhere along the order-to-cash (O2C) continuum. Other times, AR performance and subsequent cash flow suffer due to weaknesses in a company’s Credit & Collections Policy.
We had a client who developed and sold software to medium size businesses in the financial services sector. Their sales volume was growing, but they had a collections team that unfortunately lacked focus, a strategy, standard process, and metrics. Eventually, the amount of AR over 60 days past due increased to over 50 percent of total receivables.
This firm’s unstructured AR management process resulted in inconsistent collection follow up, nor was it focused on the larger amounts due. The volume of collection contact was inadequate, and individual collector performance was highly variable since it was not tracked. Exacerbating the situation, the firm’s dispute resolution process was ad hoc, and some disputes lingered well over 180 days.
Solving the Collection Process Problem
Since the problem was each collector doing their own thing in their own way, the solution involved providing structure to this company’s collection effort. It is extremely important any collection team work together and follows Best Practices towards a common goal. Our solution featured the following basic elements:
A redesigned portfolio-based Collection Strategy that focused the majority of effort on the 9 percent of customers that owed over 90 percent of the receivables asset, while still maintaining control of the thousands of small accounts that cumulatively constituted a serious bad debt risk.
A high-volume Collection Calling Effort on the larger accounts. Collection training was conducted to ensure every Collector used Best Practice techniques.
Weekly Targets for each collector in regard to key activities, specifically collection contacts made and promises to pay obtained.
Frequent one-on-one Performance Reviews with the collectors to provide feedback and improve their effectiveness.
A Collection Email Routine directed at the thousands of small-balance accounts.
An Escalation Protocol that defined the steps to be taken and their timing when an account did not respond. The steps in an Escalation Protocol should become increasingly stronger and the intervals between steps shorter as receivables age. The process ends in referral of the account to a collection agency/attorney.
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Results
By eliminating bad habits and implementing a structured and coordinated collection environment, the situation was quickly turned around. In six months, the following results were achieved:
A 54 percent reduction in the over-90-day past-due receivables
A 49 percent reduction in total past-due receivables
A reduction in bad debt expense of 45 percent
Cash released from receivables equivalent to one month of sales.
Applying the Lessons Learned…
Allowing a team of collectors to choose their own routine ensures a lot of wasted effort and under-performance. Directing all the collectors’ efforts via a portfolio-based Collection Strategy, implementing Best Practices, and monitoring performance (inputs and results) will ensure a Collection Process that prioritizes those customers and activities that will yield the highest results.
In a small company, where only one or two people may be charged with handling collection duties, the same principals hold true. The less experience collectors have, the more likely they will engage in misguided efforts that will dampen collection performance and cash flow. Prioritization, Collection Strategies, adherence to Best Practice collection principals, and performance monitoring are the ticket to success.
Your Virtual Credit Manager is ready to help you implement policies, tools and technologies to help you boost your collection efforts and increase your cash flow.