How to Optimize AR Collections Management to Improve Cash Flow?

Imagine you are on a long road trip and you realize that your fuel tank has very little fuel in it and there are no gas stations nearby. Do you think this is an ideal situation? Absolutely not! This metaphor can be related to a company trying to run its operations without adequate working capital.

At HighRadius, mid-market customers reach out to us and request us to help them with their Accounts Receivables-related issues. We always suggest a scalable solution like RadiusOne as the way forward.

The ability to generate working capital defines the financial health of your business irrespective of its size or industry sector. Since healthy cash flow is essential for mid-sized businesses, adopting the most efficient methods to enhance the cash flow becomes imperative. Moreover, with the pandemic,  companies have faced cash flow issues, especially in mid-sized businesses. As a result, businesses need to identify new effective ways to get paid faster while maintaining a positive customer experience.

Sources: PYMNTS

The collections process is the most strategic aspect of the order-to-cash cycle and is prone to many bottlenecks. Due to the absence of standardized AR collections management systems, SMBs (small and medium-sized businesses) often neglect customers who owe them large payments due to other priorities. Moreover, businesses delay cash inflow as they are unable to track open invoices and maintain a healthy Days Sales Outstanding due to lack of visibility.

Businesses want to find effective collections methods and overcome these bottlenecks. Doing this will enable them to get paid faster and identify and resolve potential cash flow issues before they become a problem.

The first step in this direction would be to identify the current payment status of different customers. The focus has to be on customer segmentation and prioritization to ensure better results.

What do Customer Segmentation and Prioritization mean?

With the rise in customer numbers, it is difficult for SMBs to optimize accounts receivables. The huge variance in cash inflow and outflow will hinder business growth and profits. Moreover, the lack of a single centralized repository of customer information will lead to time spent collaborating rather than on strategic dunning communication.

As an effective measure to speed up the process and cut down on days to collect accounts receivable, companies could group their customers into different categories and modify the dunning approach.

Customer Segmentation:

Dividing customers into different brackets and defining strategies for each bracket could enhance the AR collections process and optimize it. By adopting this method, SMBs could easily identify their high-risk customers and prioritize the required task for a better collections recovery. Let’s look at some effective strategies for customer segmentation:

• Aging Buckets: You can categorize customers based on the time periods for which the payments are due. For eg., an aging bucket can be defined for the period of 1 to 60 days which will include all the debited accounts that are 1 to 60 days past due. This could help businesses identify the accounts that are overdue for a long time and collect them as early as possible to avoid bad debts.

• Value to the Company: Based on the invoice amount, the customers can be segmented into different dollar amounts. This could help the analysts to identify the large paying customers and avoid the possibility of missing out on hard dollar payments.

• Payment Performance: The customers can be divided into high-risk and low-risk categories based on their past payment performance. This could help the analysts to identify the on-time payers and consistent late payers.

• Credit Risk Category: Customers are separated based on their credit data and the associated risk class. The customers are classified into high-risk class, medium-risk class, and low-risk class. This could help the analysts to identify the payable customers, likely-to-pay customers, and the deny-to-pay customer.

Prioritizing the Collections Task:

Based on the customer segmentation, analysts can prioritize their tasks to optimize the collections process. Analyzing aging reports, credit scores, risk categories, and dollar value could help analysts recognize the priority accounts to focus on, thus saving resources and time.

Applying different brackets on customer sets based on available data such as invoice details, credit scores, days past due, etc., helps create worklists to highlight the immediate-attention customers to low-risk customers.

However, this task becomes painstaking when businesses deal with a large customer base. SMBs often find it hard to recover the accounts receivables due to higher customer numbers and a small workforce.

To resolve this issue, SMBs can turn to technology to automate their process and increase efficiency.  With the intervention of technology and next-gen tools such as artificial intelligence, priority worklists can be automatically created.  This could help analysts get started with sending and tracking en masse collections correspondence to scale collections outreach.

Sources: PYMNTS

The technology will help increase the effectiveness of accounts receivables and reduce operational and functional costs.

Benefits of Customer Segmentation and Prioritizing

Customer segmentation gives SMBs the flexibility to design strategic AR collections recovery schemes to ensure maximum cash conversions. Based on different aging buckets and risk categories, dunning processes can be personalized for effective AR collections management.

For example, a simple automated dunning correspondence could work for low-risk customers; on the other hand, high-risk customers require a more proactive reminder with multiple payment options. Again, if a customers’ due date exceeds more than 60 days, analysts need to have a more aggressive approach with collections calls and repeated follow-ups to avoid loss in revenue.

Prioritizing tasks also plays a crucial role to increase the overall accounts receivable. For example, in the case of two invoices being under the same aging bucket, an analyst can go for the one with a higher dollar value. This ensures that open invoices with a longer period are collected first, to avoid the risk of bad debt.

Most SMBs do not have proper visibility into the daily payment status of all the customers to optimize their collections efforts. Therefore, a simple ready-to-use aging report template could help businesses take control of collections efforts and determine more strategic measures on how to collect accounts receivable faster. While excel-based templates can be of great help, leveraging technology could take businesses a step further in maximizing their cash flow.

Role of Technology

Technology will help transform the entire AR collections management process with automation by enabling SMBs to collect money faster while maintaining a positive customer experience. Digitization can enable faster cash conversions and greater accounts receivables. HighRadius’ eInvoicing & Automated Collections Solutions help SMBs automate account prioritization based on industry-specific best practices to improve collector efficiency, minimize bad debt write-offs, and reduce DSO.

With our solutions, SMBs can start on the solution-generated worklist and perform automated dunning via email with easy-to-create correspondence templates. The worklist will contain all the necessary information associated with a particular invoice and the customer along with auto-recommend actions for a faster cash-conversion. Leverage technology today to fast-track your collections process.

Here’s what you can do next:

• List out the issues you are facing with your AR facility
• Discuss different pain points with the team members responsible
• Make a list of features that you need to have
• Talk to vendors who can help you out
• Look at the ROI for your investment

At HighRadius, we have been helping our mid-market customers in this regard. Want to learn more.  You can reach out to us or get a free demo now!