Account receivable is considered to be an important piece within the financial equation of a company. Businesses aim towards collecting all the outstanding invoices before they become overdue. In order to achieve a lower DSO and better working capital, organizations need a proactive collection strategy to focus on each account. This article covers the entirety of collections with methods to prevent receivables from aging in order to mediate a method of resolving it. If a company fails to keep up with the collections, the business will be at risk. With an established and consistent collection process, businesses can avoid a bad cash-flow scenario.
The current process of collection requires many resources to maintain records for dealing with several mundane functions. Furthermore, the functions have minimal integration between them. The manual processes in the collection process can lead to creating major inefficiencies with an excessive overhead that can have a negative impact on a company’s cash flow. Outdated, paper-based processes weigh into the bad debt write-offs and put hurdles on varied growth goals. Let’s take a closer look at the entire procedure of the collection process and figure out the varied ways and channels by which companies can establish an efficient collection process.
In the initial stages of the collection process back in the ‘90s, printers were used to generate aging reports on a daily or weekly basis following which collectors would jump into “Dial-for-Dollars” phone calls. This process was labor-intensive where the collectors had to literally sit down and manually call every single customer with an outstanding payment. The means of communication was mostly phone calls. Hence, the entire process was time-consuming and taxing on resources. With the evolution of collections, the process has diverged into enabling easier access to data with more accurate and up-to-date aging reports for collectors.
The emergence of the 2000s saw the initial steps of Data Warehousing and Business Intelligence tools like Crystal Reports, Cognos, and Business Objects. In order to slice and dice the data of the various aging reports, these tools were very beneficial before contacting a customer. Collectors could segment data into smaller parts by slicing and dicing them. This was then considered to be a digital revolution that greatly enhanced the collections process. The forefront of all the operations saw Excel spreadsheets taking charge. Such technological evolution helped to save a lot of time and effort. There was still a large room for improvement when it came to manual work for analysis. Even in this case, the process of analytics was done manually to filter whom to contact and what invoices to push for.
Within the last decade, businesses have witnessed the emergence of software vendors providing customized products for Collections. Essentially, it emerged as a standard part of the collections department, just like Customer Relationship Management (CRM) tools are for the sales team. Standing as a third-generation technology, it brought about the fundamentals of automation by varied strategies and rules to remove the element of manual work to perform analytics in order to figure out which customers have to be contacted. This particular system worked out to quite a degree. Along with the introduction of email and companies leaning more towards it, a good amount of phone calls started to shift to email communications instead.
Traditional methods of collection including aggressive calling, sending additional invoices, and making collections in-house have proven to be very unsuccessful and consume a lot of time with the increased number of customers. Even with decades of developments, companies fail to segregate customers efficiently. The processes fail to comply with the change in the mindset of customers and different patterns. A typical collection process is regarded to be very reactive. The process is dependent heavily on due-dates for any kind of dunning. The primary elements of the process including account prioritization, correspondence, and customer collaboration which are all based on various static parameters. This is bound to age buckets and the value of invoices. Eventually, this leads to making a cluttered collection worklist along with an inefficient identification of delinquent accounts, and inoperative collection efforts.
In the absence of a scalable collections process, the dynamic parameters are not taken into account. Collectors keep going after past-due A/R even when the overall team productivity is low. Instead, they keep on the lines of labor-intensive, time-consuming, and low-value tasks of ERP data collation, creation of a manual collection worklist, and ineffective correspondence with customers. Furthermore, this leads to a negative impact on the cash conversion cycle, increased Days Sales Outstanding (DSO), and comparatively, higher operational costs. In today’s economy, finance leaders term DSO as the primary Key Performance Indicator (KPI) to evaluate the performance of the Accounts Receivables (A/R). The collection process may be the cornerstone for driving company goals and objectives. For example, working towards preventing delinquency will not only decrease the overall cycle time but also improve cash flow and help in maintaining control of the entire collection process.
In the current scenario of most companies, the entire process of collection is still regarded to be reactive. Even with that, with the introduction of better alternatives to handle operations, there’s been a dynamic shift from a reactive to a proactive collection process. For example, with Machine Learning (ML), collection teams could essentially leverage high-impact predictions that help in enhancing the overall output. It also impacts the key KPIs like DSO and CEI (Collection Effectiveness Index). A high DSO number says that a company is selling its product to customers on credit and that it takes a lot of time to recover it. It could essentially mean that the company’s customer base has credit issues or that the company has an ineffective collection process. Particularly, this deficiency can have a negative impact on the smooth running of operation and business.
In the course of time, collections management has turned from a call-centric “Dial-for-Dollars” into a process that houses a versatile set of operations. This includes prioritization of worklists, customer collaboration, logging call notes, better communication details, tracking and reporting of payment commitments, automatic set-up of reminders, follow-ups, and close monitoring of the collections analytics. Let’s carry on to look at the different operational dimensions of the collection as a process along with varied ways to revamp it. Empowering the sphere of collection operations from reactive to proactive will enhance the DSO along with the working capital.
Basically, a prioritized worklist is the first step in the collection process. The worklist defines the work order in which a collector is supposed to be working on. This will include dunning processes on any open or past-due invoices. Initially, collectors usually relied on their intuition, skill, and experience to just skim through the entire worklist to prioritize accounts and finally reach out to the said customer. In the absence of a prioritized worklist, there is a lack of visibility leading to a disorganized utilization of resources.
A/R teams have continued to use static factors like aging and invoice value to prioritize the accounts. This helps in filtering the work that collectors are supposed to be working on. Conventionally, these factors of delinquency have not been successful in producing a satisfactory output. With tens of thousands of customers and open invoices, the time and effort spent on critical collection accounts are essential in order to ensure account coverage and produce positive growth. Collection teams spread across industries need to consider dynamic and leading indicators to set-up a proper worklist prioritization for a scalable process and function. The major concern for companies now is to generate an efficient prioritized worklist. Companies are looking for a scalable solution that can ensure to easily integrate with the ERP system. Furthermore, the alternative solution should also ensure compliance with the business rules of the company and include dynamic collection rules and strategies. In order to achieve this, real-time data is an important element to address the varied changes in customer behavior along with securing the reflection in the collection efforts by the company.
An easy solution to enhance the collection process of worklist prioritization could be by creating customer segmentation. For example, re-focusing the collections activity and functions towards high-risk accounts. Individual bucketing of the customers also includes proactive invoicing along with escalated correspondence measures. This is defined to be a great way to refine the account prioritization and ultimately, the collections worklist. Furthermore, this could also be beneficial in removing redundant items in the worklist to improve a collector’s productivity. Take for example where a customer has a patterned history of multiple disputed invoices, they would need a collection process strategy that helps in identifying any potential disputes at the earliest. This particular strategy would further contribute towards re-prioritizing the worklist to eliminating or reducing the priority of varied disputed invoices. It will enable collectors to transfer their focus on more strategic, at-risk accounts and at the same time, make improvements on the efforts to deal with the low-hanging accounts with better clarity and efficiency.
In order to take corrective actions, businesses need to modify A/R strategies to be able to monitor performances and draw valuable insights. The primary goal is to make a proactive collection operation that does not solely depend on traditional excel sheet reports or metrics like DSO to evaluate the entire process. With the advancement of technology, real-time reporting and analytics is no longer a pipe dream. It saves time and provides a concrete way for organizations to implement an optimized collection process. Particularly, this assesses customer segmentation, account prioritization, and the generation of worklists for collectors.
For the collection operation, data is termed to be the fuel of the carriage. It is essential to be included in worklist prioritization and customer correspondence. The different types of data could be ranging from open A/R data, billing, data from other teams like cash application, credit management, deduction management, payment commitments, collection agencies and invoice discrepancies. The thing to focus on is the information that is to be recorded and how is it particularly retrieved and shown when required. Real-time and accurate data is regarded to be an important part of any collection procedure.
With the increase in the diversity of the type and content of data, a single format is not enough to store the varied data. A single source of data makes the functioning of the collection process a lot more stable and seamless. Furthermore, a single source and point of data will make it easier to deal with disparate points of reference in order to carry out routine collection tasks.
The inconsistency in data can critically impact the entire collections process. For instance, collectors may be calling up customers who have already paid against the particular invoices but it’s not updated in the system. This scenario occurs mostly when the cash is applied in batches. The real-time data is not made available to the analyst. It might also result due to the incorrect application of the cash. Basically, it leads to the wastage of time and efforts which could have been used for any at-risk account. Furthermore, this also reflects badly on the beleaguered customer as a result of the redundant collections efforts.
With the revolution of automation solutions, companies are seeking fortitude by getting their hands on real-time data integration to the A/R teams. This ensures the proper availability of data that is accurate and readily available virtually at a single click, without any hurdles. It also helps in maintaining transparency and makes it a lot easier for the collector on what to do next. With an autonomous solution like a self-service portal, customers can view and download invoices and account statements easily. They can also create disputes, make payments, and submit any payment commitments. Furthermore, it provides a single go-to platform to share claims and POD documents which eases the collector’s workload to a great extent and speeds up the collections process while providing a high-quality customer experience.
A good collection strategy includes effective communication with customers. Companies should be clear about payment expectations as it makes it easier for customers to pay back. Initially, phone calls were regarded to be the best way to contact customers. Over the years of development in the technological field, email communication is now considered to be the standard mode of contact for past-dues or any monthly statement. Whether it’s a phone call or a collection letter, the presentation of the message is everything. The main focus is to be clear, concise, polite, and professional in customer correspondence.
Payment via check is still prevalent in many business spheres. The thing to remember is that customers who pay via checks need to be sent reminders a lot earlier than those who choose to pay via electronic mediums for the due-dates. Particularly, this is because the check payments need time to settle in the bank which poses a threat of time lag between the collection process initiation and cash posting. Furthermore, it can also lead to inaccuracies in customer correspondence. In the case of payments made by customers via ACH, Credit Cards, or ACH- the payment settlement in the bank is in real-time which makes it possible to apply the cash the same day and update the open A/R. There is also an option for self-service portals for customers to make payments which could solve the twin problems of invoice deliveries and payments.
Collectors are required to keep track of all the information sharing during customer correspondence. Basically, this includes logging call notes, recording the payment commitments, highlighting the specific queries made by the customer, or adding any future follow-up tasks to be accomplished. This will help collectors on staying on top of their accounts with a single source of communication details. Additionally, this will also enable a seamless transition of the account within the collections team as well as other teams, in any particular case of escalation. With the information at hand, collectors need to keep a close watch on the commitments made by customers and follow-up if necessary. Executives at the top-level strongly believe that customer correspondence holds a primary position within collections. Choosing whom to contact is essential because often, collectors end up contacting non-critical customers which is a waste of time and resources.
The major problem that companies face in dunning and correspondence is the manual nature of the work. Ad-hoc manual correspondence requires a very high Full-Time Employee (FTE) involvement. This involves paper-based invoicing along with several external tools. With the increased volume of customer base, it can get really stressful for collectors to handle customer correspondence. There’s no structured format or standardized strategy in place for dunning activities. In some cases, customers were only contacted after they hit their due-date, this is not a case of a gentle reminder. Moreover, this also hampered customer relations. At times, the accounts that hold small-dollar values are neglected as the collection process only focused on large-dollar accounts.
Even with the rapid evolution of the collection process, dunning via phone calls is still a thing. Collectors deal with collection calls as a part of their workload every single day. It is still regarded as one of the most effective dunning strategies as it adds a sense of personal touch to customer collaboration enhancing customer relations. Dunning and effective correspondence techniques can essentially help in providing a better solution for correspondence related problems. With the progressive drive towards digitalization and e-adoption, automation software stands to be one of the top solution features that provide automated dunning via email, fax, print, and mail. Additionally, it also offers easy-to-handle correspondence templates that make it seamless to enhance account coverage. Hence, collectors only have to contact the critical customers through the phone while the rest of the segmented customers can be contacted via email. Most automation software facilitates call notes, correspondence logs, and other means to save information with the customer. Essentially, it eases the workload of collectors and provides single-point access to all the data history with the customer. This provides a bridge to fill the gap between the current process of collections and an efficient collection management solution.
Collections cannot exist as an isolated process within a business. The collections team often interacts with different departments such as the cash application department, credit, sales, and other A/R teams. The main question remains – how can collectors collaborate effectively with internal and external stakeholders? A collector may need to get in contact with the credit department along with the deductions team. This will help in getting more information about the open A/R accounts, credit scores, risk categories, and any cases of disputes.
Collaboration within different teams and departments is the key to break down silos. Collectors may need to correspond with each other during the transition of accounts or in cases of escalation. They may need to connect and collaborate with the cash application team in order to get accurate, definitive, and real-time data on the open A/R to create a collection’s worklist. The credit department may help the collection team in getting credit scores along with risk categories to evaluate varied rules and strategies for the process. Collectors could leverage the provided credit information to drive negotiations. Furthermore, the deductions team may also forward pre-deduction line items while staying up-to-date on the disputed invoices for a faster recovery.
The major problem for collections in corresponding with so many business operations is to get accurate and real-time data. Integrated product solutions offer a way to integrate seamlessly with other departments and easily support other functions and processes. With the help of that, collectors can collaborate with A/R teams within a common portal.
The entirety of the collection operation is said to be people-driven rather than depending on the process. Conventionally, the entire process relies heavily on manual effort, skill, and speed of the individual collectors. This leads to creating a loophole which causes a disadvantage. One of the major concerns within the A/R space is that the people involved should not inhibit the ability to scale collections. With the increasing volume of invoices, a noticeable turnover in the collection team could essentially harm the DSO of the business. This is due to the disorganized and sloppy nature of the collection process. Furthermore, the collection analysts need to be properly educated with the A/R space along with the best practices of credit and collections. This also includes the laws and regulations that come around with customer correspondence and management skills.
Encouragingly, companies can essentially opt for management solution software that allows senior offers to manage their collections team. This is based on keeping track of the performance metrics and KPIs. Additionally, these collection management software solutions are effectively programmed to assign new accounts to different collectors.
In the day-to-day collection operations, there is a range of touch-points with customers. Even with that, traditional collection processes have only focused on the financial sphere rather than focusing on individual characteristics or limitations of a customer. For instance, collectors would wait till the past-due date arrives in order to get in touch with customers and then pester them with reminders. Many companies have witnessed a dip in onboarding new customers and hindered the pipelining of new customers due to poor customer experience. In the current competitive world of business, customer experience is a distinction that aims at providing a world-class experience to customers.
Customer segmentation provides an effective approach towards dealing with the collection process. This includes competent ways to target customers and hence, provide tailored collections strategies to tend to their intricate needs. For example, the invoice delivery for paper invoicing needs to be a lot sooner than for customers who opt for e-invoicing. Prioritizing the customer experience over dialing for dollars paves the path for better customer experience. Essentially, this can be achieved by gaining real-time visibility into each of the customer accounts. Moreover, this would also ease the workload of a collector. With proper customer satisfaction, businesses can gain competitive advantage along with increased profitability for a strategic lift in their processes.
The transition of businesses into mobile technology will give organizations get their hands on accurate information and save a lot of effort and resources. Mobile devices have continued to have a huge impact on the techno-savvy world. Collection departments and A/R management agencies continue to focus on adopting varied alternatives to improve their collections. It is beneficial to use as it provides a flexibility factor where customers can readily have access to their credit scores, credit reports, and receive details about driving factors that affect their credit scores. Additionally, it can be accessed whenever and wherever they need and want. Customers are continuously looking for ways to keep themselves up-to-date with their accounts. Mobile applications will provide real-time visibility into the collection activities and keep a track of performances within industry-specific dashboards.
Furthermore, mobile-based transactions are also growing continually with the development of new methods to pay. Payments can be actioned quickly, leading to a faster collection process. Even collectors will have a chance to stay up-to-date with accounts with applications that allow them to work anywhere and anytime. Essentially, this will allow collectors to be much more efficient in their work and hence, improve productivity.
Machine Learning is defined as the study and construction of algorithms that continuously learn from. ML makes accurate predictions based on a large amount of data that is collated. With the help of ML, executives can ensure to provide more value to customers.
Within the collections process, ML could be leveraged to enable predictions on payment dates by using historical A/R data. It is capable of doing so by identifying the relevant variables. It also analyzes the valuable intricate patterns within the collection cycle. It is helpful in predicting a particular payment date for a customer. It will help to ensure that the collection team becomes proactive with enhanced collections strategies.
With the introduction of Artificial Intelligence, businesses have diverged into space where it is easier to segment customer accounts based on various dynamic factors. A proactive Collection Management solution embedded with AI will also help in de-cluttering the collections worklist. It helps in providing an optimized solution effort with better insights into accounts. This includes faster resolution of low-value transactions for low-risk accounts and better decision-making strategies for high-value and at-risk accounts. Additionally, AI stands to provide a broader scope than conventional methods of correspondence. AI-based solutions come to segment customers based on risk segments and provide proper correspondence strategies with sentiment analysis. As a result, collectors can hence be reallocated to higher-value tasks rather than focusing their manual efforts on minimal-value tasks.
The collection output can be enhanced in various ways:-
Identification of all the potentially delinquent accounts by considering historical data of the customers along with real-time credit analysis of each customer account.
Ultimately, AI is now considered to be the biggest asset for a business’s growth. An effective AI-based solution can boost efficiency and improve the customer experience for collections. Additionally, the collection team can collaborate better with other departmental teams for invoicing, dispute resolution, and even payments. It also provides a high-level of visibility into operations and reporting capabilities. With a savvy technology, the people and processes within the collection process can automate manual tasks, improve on standardization throughout the business agenda, and scale on cash forecasting.
The collection operation within organizations is in dire need of innovations that could improve the overall process efficiency and help in recovering the cash. Technology stands as a pillar of change for varied industries which brought about enhancements to the traditional processes. Leveraging the power of technology could play a key role in adopting methodologies that could prove to be effective in enhancing the collection process. Ultimately, it will help in recovering cash faster without any hassles and help in maintaining goodwill with customers.
HighRadius Collections Software automates and optimizes the credit & collections management process to improve collector efficiency, minimize bad debt write-offs, improve customer relationships, and reduce DSO. It provides a complete set of tools to optimize and automate the credit collections management process and enable the better prioritization of credit collections activities All the information you need (invoices, dispute information, POD, claims, tracking info, etc.) on each case is automatically presented in a collections work-space and is ready for use. Apart from the wide variety of benefits that it has, it also comes with some amazing features like CADE (Collection Agency Data Exchange), collector’s dashboard which has prioritized collections worklist, automated dunning & correspondence, dispute management, centralized tracking of notes, call logs & payment commitments along with cash forecasting functionalities. The result is a more efficient collections team that contributes to enhanced cash flow and reduced DSO.