How To Improve AR Collections Process In The Present Scenario?

1) Changing consumer behavior requires a change in collection strategies. Start by ensuring that you have an iron-clad contract, which includes comprehensive clauses to establish the credit terms.

2) To avoid having difficulties in gathering data, you can ask your clients to fill out credit applications. For such uses, a ready-to-use credit application template helps automate the data collection process.  You can also contact credit agencies and enquire about a customer’s past credit and payment history to learn more.

3) To avoid late payment, you can set up a process and act on it. Adopting proactive approaches in invoicing and collections recovery can help you get the payment before the due date. Having a deadline in place and following up with the customer can minimize the risk of bad debt.

4) Aggressive collection strategies can affect your long-term customer relationships. The tone of your voice can impact the success of your conversation. Always listen carefully to what the customer tells you and try to keep the dialogue constructive. Stay calm even if the debtor becomes a bit difficult to handle. This will ensure that your communication is successful without hampering your relationship with clients.

The economy always has and will have ups and downs. It’s easy to coast through the good times, but how do you come out of the tough times unscathed? The deterioration in the payment behavior of your customers could have a crippling effect on your business’s cash flow.

Here are some best practices that can help you minimize collection risk:

1. Use analytics to assess accounts receivable portfolio

It is important to identify the accounts in your portfolio and categorize them into different segments so that you can focus and tailor collections strategies to the accounts that need them most.

• For good accounts (low-risk customers), the customers are in a strong financial position and pose almost no credit risk. Often, they may not even require a lot of follow-ups
• For fair accounts (medium-risk customers), the customers are in a relatively good financial position and pose a low credit risk. Here, a  polite reminder call can get your customers to pay on time.
• For poor accounts (high-risk customers,) the customers are in a weak financial position and pose a considerable credit risk. For these customers, you need a firm but a polite approach that will include dunning, calls, and other forms of communication. The most critical factor to keep in mind is being aware and taking timely action.

Figure: Customers Classification Categories

2. Renegotiate payment terms with customers

Renegotiating with customers carrying payment risk often gives you more chances of possible collections recovery. Some strategies to follow could be:

• Give your customers incentives to encourage early payments as small discounts are sometimes enough to speed up collections.
• Provide your customers with short-term relief in exchange for prompt payments. This could work for customers in temporary financial distress (i.e. ‘Fair’ accounts).
• For customers who are unable to pay due to cash flow problems or liquidity issues (i.e high-risk customers), work out payment plans with them to avoid bad debts.

3. Monitor your accounts receivable with key metrics

Including metrics such as accounts receivable turnover ratio, days sales outstanding, and accounts receivable aging can help you in spotting potential cash flow problems early. Measuring these metrics can help you:

• Enhance cash flow.
• Lower utilization of lines of credit.
• Improve customer satisfaction.
• Reduced write-offs and bad debt

As the situation today is becoming more challenging and volatile, adaptability is key. The methods of collections recovery can range from easy payment options to incorporating new technologies and so on. Your approach should be gentle to ensure cash conversions without losing the relationship with customers. Incorporate new-gen technologies such as artificial intelligence into your collections processes to skyrocket your business growth.