How To Improve AR Collections Process In The Present Scenario?

What you’ll learn


  • Learn the benefits of updating the existing collections process as per the requirement of the new normal.
  • Explore the benefits of adapting new collection strategies to ensure better receivables.

How To Improve AR Collections Process In The Present Scenario?

Due to immense global upheaval,  you may find that running a business with outdated tools and strategies in the current situation can be devastating. For example, companies running on paper trails have been severely affected because of the pandemic due to the inaccessibility of real-time data.

Companies that still operate and depend on their old, traditional systems in this advanced world can find themselves in a difficult situation. Among the various steps within the order-to-cash cycle, a company’s main focus needs to be primarily on its collection process.

Collection is a delicate task, that requires detailed work and finesse, and the current crisis has made it even more challenging. Inefficient collection processes can result in poor cash flow, repeated follow-up, and often lead to a poor customer experience.

As a result, businesses are turning to technology to find new ways to help customers with their needs while protecting their future.

At HighRadius, mid-market customers often reach out to us and seek our fintech expertise to solve accounts receivables-related issues. We always suggest a scalable solution like RadiusOne as the way forward.

Friction Related To Collections Recovery During Uncertain Economic Swings

In an ideal situation, customers would simply pay their invoices before the due date. But the reality is different.  You need to act quickly and stay determined, to make the collection process easier.  In collections, acting quickly will help you collect the money owed on time, and staying determined can ensure that you get paid in full.

The first step to streamline your collections processes is to identify the challenges. Listed below are some of the common collection challenges.

How To Improve AR Collections Process In The Present Scenario?

1. Change in customer behavior

In the present scenario, most customers want flexible deadlines due to cash flow limitations. So it is essential to identify customers and segment them accordingly. Proper segmentation will help reduce receivables risk. You can classify your customers for risk based on credit scores, credit limits, customer financial history, and aging buckets.

2. Difficult to access data

Often, it is difficult to find updated and accurate contact information of a debtor. This happens primarily due to the following reasons-

  • Perhaps the contact information used for the original credit is out of date, i.e real-time data is absent.
  • Maybe there’s an incorrect entry for the debtor in one or more of the available databases.

Trying to locate and access up-to-date customer data without a central repository can eat up a collector’s daily time and effort.

3. Aggressive collection strategies

Collections processes need the right balance of persistence tempered by a gentle tone of voice. If you come across as headstrong, it can cost you a customer. Sometimes, customers may have missed a payment due to something as mundane as forgetfulness.

In other cases, it could be that they are facing temporary fund problems. It is always advisable to assess the situation and follow up with the client, keeping in mind that you have to maintain a positive customer experience for a long-term business.

4. Unavailability of the customer’s team

In some cases, the delay in payment could be due to the unavailability of the customer’s team. This mostly happens in SMBs(Smaller Medium Businesses) where the workforce is small with limited resources. Here collection includes mostly dunning communication through regular calling and sending emails which are both time-consuming and ineffective.

Now that we have identified the barriers to debt collection, we need to find ways to address these challenges and improve collections recovery.

How To Overcome Collection Challenges?

“Worry never accomplishes anything. When you have a problem, it is best to concentrate on the solution to that problem, not the problem itself.” – Thomas D. Willhite

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.

Collections In The Next Normal: A Blueprint For Future

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.

How To Improve AR Collections Process In The Present Scenario?

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

Conclusion/h2>

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.

To learn more about how digitization can help in your collections recovery, check this blog on How to Improve Collections and Dunning with Automation?

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The HighRadius RadiusOne AR Suite is a complete accounts receivable’s solution designed for mid-sized businesses to put their order-to-cash on auto-pilot with AI-powered solutions. It leverages automation to fast-track key accounts receivable functions including eInvoicing & Collections, Cash Reconciliation, and Credit Risk Management powered by RadiusOne AR Apps to improve productivity, maximize working capital, and enable faster cash conversion. Affordable, quick to deploy, and functionality-rich: it is pre-loaded with industry-specific best-practices and ready-to-plug with popular ERPs such as NetSuite and Sage Intacct. The HighRadius RadiusOne AR Suite is designed to automate labor-intensive processes while streamlining credit and collections activities for faster AR processing, better cash flow and improved profitability.

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