The Right Approach to Develop a Collections Strategy
One of the top priorities of CFOs and finance leaders across industries is working capital management. Accounts receivable teams aim to leverage their collection efforts to impact cash flow, mitigate credit risks, and reduce the cost of borrowing by lowering DSO, reducing the number of past due invoices, and eliminating write-offs.
In our experience with over 350+ B2B SME suppliers, a common observation has been that companies usually rely on their basic ERP functionalities and work with the golden rule of 80-20, thus leaving a big slice of their accounts receivable on the table. Therefore, the need of the hour is for organizations to develop collections strategies that increase the process effectiveness and help CFOs achieve their long-term objectives.
Developing the Right Approach
The right approach to developing a collection strategy begins by identifying the right objectives for your collections team. As an A/R manager, you need to ensure that your collections team has the following three goals:
While basic collection strategies and ERP functionalities could help you achieve the first two objectives, your AR team will end up wasting time and effort on the “wrong” customers, thereby increasing the cost of every collection effort.
Developing an Effective Collections Strategy
Adding a New Dimension to Collection Strategy
Suppliers need different collection strategies, depending on their customer base. While developing these strategies, it is important to understand that a one-size-fits-all approach can’t be applied to buyers across different sizes, industries, and business relationships.
A very important criterion to develop collection strategies is for the company to KNOW THE CUSTOMER!
Understanding the customer, in more technical terms, is what organizations refer to as Customer Profiling. In order to collect faster from your customers, you need to be able to predict how they are going to respond to a dunning activity. More often than not, businesses have a lot of customer data at their disposal which they could convert into intelligence and translate into the right collection strategy to achieve their objectives.
Customer Profiling : Key Factors
Categorize your accounts receivable according to the length of time an invoice has been outstanding. The different aging buckets to be considered are 0-30 days, 30-60 days, and 60+ days. Aging reports give you an idea of how much a customer owes you, and for how long, depending on which you could develop the most effective dunning approach for each segment.
Evaluate if your customer is a fast payer or a slow payer depending on their payment history. One way of doing that is to compare the average days of delinquency with the industry average. If the ADD is less than or equal to the industry average, then the customer is a fast payer, otherwise, they are a slow payer.
Risk Category Determination
Based on the customer’s credit limit, payment history, amount of debt, reference checks, and related factors, you would be able to segment your customers into high, medium, or low-risk categories. The weightage assigned to each one of these factors varies from one company to another, but the overall result is imperative to determine the right collection strategy that is more likely to produce successful dunning results.
12 Collection Strategies for Every Aging Bucket
Plan Of Action: 12 Effective Collection Strategies
The impact of working with data-driven collection strategies can be seen in the fact that most businesses spend 25% of their effort on collecting from customers who would have paid anyway; best-in-class businesses spend less than 5%!
Collections is one of the most strategic processes of the Order-to-Cash cycle. Its impact is visible on long-term business objectives of lowering DSO and improving working capital. In order to achieve these objectives, what organizations need, beyond a proactive collections team, is the right strategy to collect from each account.
- Studies have shown that leveraging customer data and past collections experiences could increase identification of delinquent accounts by up to 5 times
- Leverage data to identify payers who would remit without wasting collection effort to reduce the cost of collection operations
- Track monthly delinquency trends and month-on-month delinquency changes in each aging bucket
- Track payment mode across top customers, compare with payments made in previous months and adopt push strategies to drive change in relevant customers’ payment mode
Collections has a direct impact on an organization’s finance objectives as well as its relationships with customers. Hence, collection strategy is not just about collecting money faster but also prioritizing relationship management and ensuring that your collection efforts deliver the biggest bang for your buck.
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HighRadius is a Fintech enterprise Software-as-a-Service (SaaS) company. The HighRadiusTM Integrated Receivables platform reduces cycle times in the order-to-cash process through automation of receivables and payments across credit, electronic billing and payment processing, cash application, deductions, and collections.
Powered by the RivanaTM Artificial Intelligence Engine and Freeda Virtual Assistant for order-to-cash teams, HighRadius enables organizations to leverage machine learning to predict future outcomes and automate routine labor-intensive tasks. The radiusOneTM B2B payment network allows suppliers to digitally connect with buyers, closing the loop from supplier receivable processes to buyer payable processes.
HighRadius solutions have a proven track record of optimizing cash flow, reducing days sales outstanding (DSO) and bad debt, and increasing operational efficiency so companies may achieve strong ROI in just a few months.