4 Factors That Make Collections Difficult and Why Do Finance Analysts Need to Act Now?

19 May, 2023
4 min
Brett Johnson, AVP, Global Enablement

Listen to the blog:

12:36 min

Table of Content

Key Takeaways
Introduction
Caution: Disadvantages of Debt Collection
Collections weigh heavily in an analyst's daily routine
You are getting stuck with sticky notes
With a lot of customer data, comes a lot of responsibility
With too much responsibility, analysts turn ineffective
You are working with old collection methods
Three Key Strategies for Successful Collections
5 Ways to Improve Your Collections Performance
Afterthought

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Key Takeaways

  • If not done properly, debt collection can pose certain risks and challenges like strained customer relationships, legal and regulatory risks, cost induced, and more.
  • Using outdated collection methods can lead to bad debt and disputes over deductions. Adopting technology can improve collections, make dispute management easier, and increase team efficiency.
keytakeway

Introduction

If you are a financial analyst in the current volatile market situation, then it is likely that you are wrestling with divergent forces in the current market. The current Covid crisis has created a noticeable dent in the revenue of many industries.

While you can fix some of it with a little adjustment here and there, short-term solutions will not solve the cause. Our approach at HighRadius has always been to dive into the roots of the problem. In this case, we have decided to take you on a trip on the day of a finance analyst to understand improvement areas in the accounts receivable department in a mid-sized business.

Caution: Disadvantages of Debt Collection

There are certain disadvantages that come in the path of debt collection. It can present various challenges and risks for businesses. To mitigate these risks, companies should adopt ethical and customer-centric debt collection practices, comply with legal and regulatory requirements, consider alternative dispute resolution methods, and employ technology-driven solutions to optimize the process. But first, let’s understand the disadvantages of debt collection.

What are the disadvantages of debt collection?

Below are the seven disadvantages of debt collection:

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  1. Strained customer relationships
  2. Legal and regulatory risks
  3. Resource-intensive
  4. Cost implications
  5. Uncertainty of recovery
  6. Negative impact on cash flow
  7. Reputational risk

7 Disadvantages of debt collection

  1. Strained customer relationships
  2. Legal and regulatory risks
  3. Resource-intensive
  4. Cost implications
  5. Uncertainty of recovery
  6. Negative impact on cash flow
  7. Reputational risk
  1. Strained customer relationships: Debt collection can strain relationships between creditors and debtors, potentially resulting in reputational damage and loss of future business.
  2. Legal and regulatory risks: Debt collection is subject to various legal and regulatory requirements. Failing to comply with these rules can result in legal action against the creditor.
  3. 3. Resource-intensive: Debt collection can be a time-consuming and resource-intensive process that involves multiple phone calls, letters, and legal procedures.
  4. Cost implications: Debt collection can be expensive, particularly if a creditor hires a debt collection agency or attorney. The cost may outweigh the amount of debt being collected, making the process unprofitable.
  5. Uncertainty of recovery: There is no guarantee that a creditor will recover the debt owed to them, even with effective debt collection methods.
  6. Negative impact on cash flow: Debt collection can impact a company’s cash flow, particularly if the debt is significant.
  7. Reputational risk: Unfair or aggressive debt collection practices can damage a creditor’s reputation, potentially resulting in a loss of future business.

Collections weigh heavily in an analyst's daily routine

A finance analyst’s day in a mid-market business can be described as ‘eventful’. As it starts, analysts go over their worklists for the current day. This includes the review of consumer accounts they need to follow up based on previous conversations and identifying delinquent accounts to focus on, for the rest of the day.

AN ENTIRE DAY IN THE LIFE OF A FINANCE ANALYST

Finance analysts have to face situations with conflicts that can have a lasting impact on an hourly basis. Often, it is challenging to seek real-time information about their customers from various sources. As a result, they have to work with disjointed information that can result in false promises from customers.

You are getting stuck with sticky notes

The analysts’ job is to negotiate maximum payments or promises of payment from customers. However, their greatest source of information is often the sticky note. Analysts mostly prefer to jot down important aspects of any customer interaction on sticky notes. Why? Because it’s easy to find, possible presents on every desk of their workstation. But apart from its environmental implications on deforestation, sticky notes are very easy to get misplaced. This outdated resource makes it difficult for the analyst to sort through past interactions with their customers.

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With a lot of customer data, comes a lot of responsibility

Today data is the key to the success of a business and analysts take their data seriously. Since they have multiple roles and responsibilities in their organization, it becomes difficult for them to keep track of the right data. This data can potentially help the analyst to resolve accounts faster, or prolong the opportunity cycle to resolve such accounts if the data is incorrect.

With too much responsibility, analysts turn ineffective

Imagine being in the shoes of a finance analyst. Your responsibilities could supersede your expectations and can lead you to over utilize the resources around you. Analysts in most mid-sized businesses in the USA are majorly involved in simultaneous operational processes apart from just collections involving cash reconciliation, credit review, and dispute resolution. This can create a bottleneck that affects the overall AR operational efficiency.

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For a Blue-Chip AR analyst, digitization offers the necessary tools, which has a ripple effect across all their operations. In the past, making a strategic change across the business was a challenge. But in today’s market, seamless integration with the technology has paved a way to revitalize AR operations with minimal fuss.

You are working with old collection methods

When you work with outdated technology, you are likely to face a collections gridlock. These include AR problems like increased bad debt from smaller accounts, processing and analyzing of new and current accounts, and managing deductions.

Apart from your work-life it also paints a picture of distrust from customers. On the other hand, how can analysts collect faster from their delinquent customers? In short, they need to be vigilant and diplomatic.

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Disputes over deductions: Treading between controversy and ease. Let’s be clear, deductions should be a separate entity from collections. When unmanaged they can consume an undue amount of time and resources. A dispute management solution can take care of faster deductions through the early capture of claims and disputes.

The rationale to harness technology

Here’s some rationale to help analysts and CFOs understand why they should adopt technology to create a significant impact on their revenue.

  • With the right technology, comes automation. The power of automation is second to none. With the right sets of rules, any business can define its collection strategies. These strategies along with automation, analysts would be a click away to determine their customers’ credit scores
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  • Automate AR aging buckets by setting the organizational rules in the collections dashboard. The dashboard would be the single source of truth for all customers. Such an ar dashboard would allow for seamless collaboration with other AR analysts. Analysts can take notes and compare notes in the dashboard itself. Notepads/sticky notes would now be a thing of the past.
  • Never miss following up with delinquent customers with an intelligent payment tracker. This tracker would gently nudge analysts to follow up with accounts, proactively. Struggling to send the correct correspondence to customers? The AR dashboard has a plethora of email templates that make up for every situation on any type of customer. Analysts can also opt to call customers directly from the dashboard to avoid any serious hassle.
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  • Auto Generate reports and dashboard, on the go. Reports on important accounts, operational expenditures, and overall revenue could help in assessing essential v/s non-essential strategies for any business. Track KPIs on the dashboard and plan on how to collect faster from unpaid customers.
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‘SOME HOURS’ IN THE LIFE OF A FINANCE ANALYST

Three Key Strategies for Successful Collections

Collection problems can create financial challenges for mid-sized businesses and impact their cash flow. To solve collection problems and recover outstanding debts, you must adopt the three most effective strategies that can improve your chances of success.

  1. Effective Communication: Establish a clear and open line of communication with the debtor, explaining the debt owed and the consequences of non-payment. Keep communication respectful and professional while focusing on finding a mutually acceptable solution.
  2. Documentation: Keep accurate and detailed records of all communications, including phone calls, emails, and letters. Documentation serves as evidence in case of legal disputes and helps track progress in debt collection efforts.

Flexibility: Be open to negotiating payment terms and options, such as payment plans or settlements. By being flexible, creditors can increase their chances of recovering the debt while maintaining a positive relationship with the debtor.

5 Ways to Improve Your Collections Performance

As a finance analyst, improving collection performance is crucial for maintaining financial stability. Here are five effective strategies for finance analysts to improve collection performance:

  1. Analyze Debtors: Analyzing the debtor’s financial situation can provide insight into their ability to pay outstanding debts. Conduct a thorough analysis of the debtor’s credit history, financial statements, and payment trends to determine their financial capacity.
  2. Optimize Communication: Effective communication is critical to improving collection performance. Establish a clear line of communication with debtors and explain the debt owed and any consequences of non-payment. Communication should be respectful, professional, and aimed at finding a mutually acceptable solution.
  3. Streamline Collection Process: Streamlining the collection process can improve collection performance and increase the chances of recovering outstanding debts. Utilize technology-driven solutions, such as debt collection software, to automate and optimize the collection process.
  4. Offer Payment Options: Offering payment options, such as payment plans or settlements, can improve collection performance by increasing the likelihood of recovering the debt while maintaining a positive relationship with the debtor.
  5. Monitor Performance: Monitoring collection performance can provide insight into the effectiveness of debt collection strategies. Regularly review collection metrics, such as collection rate and aging reports, to determine the effectiveness of collection strategies and make adjustments as necessary.

Improving collection performance as a finance analyst requires a combination of analyzing debtors, optimizing communication, streamlining the collection process, offering payment options, and monitoring performance. By implementing these strategies, finance analysts can recover outstanding debts, improve cash flow, and maintain positive relationships with debtors.

Afterthought

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Now with a collection management solution, the analyst’s day gets streamlined and resourceful. From a single source of information, tracking delinquent accounts and sending correspondences becomes efficient. Collaboration is seen as a welcoming addition, with less time taken to find vital notes. While more time is invested in strategizing collection policies and analyzing KPIs.

This is the way

In the absence of a proactive approach to managing collections, the mid-sized businesses may be at the risk of being left behind. With proper supervision, businesses can certainly get started with automating their collections while bolstering their AR analysts. It’s a case of, the right tools for the right people. The results speak for themselves with an average of 10% reduction in DSO, improved productivity, and better-working capital reserves.

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