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10 Questions about Proactive Collections Management Answered

17 November, 2021
4 mins read
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What you'll learn

  • Learn why adopting proactive collection strategies is crucial for finance executives in mid-sized businesses.
  • Learn about collection best practices that can help scale your business with improved cash flow and superior customer experiences.
CONTENT
Why has it become so crucial to consider proactive collection measures?
10 Questions every CFO should ask about proactive collections management
A way forward
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Introduction

Today, the CFO and his team are continuously trying to optimize their AR collection processes to accelerate payments and solidify cash flow. They are expected to create flexible business models that can react quickly to market changes and provide deeper insights and a clearer strategic direction.

As a result, many SMBs have started adopting the best technologies to enable more intelligent, efficient, and sustainable workflow within their ecosystem. Implementing a top-notch proactive collections management strategy with the help of automation has become an integral part of their policy. As per PYMNTS, 87% of the SMBs that have implemented automation technologies in their businesses enjoy faster processes, improved team efficiency, and superior customer experiences.

Investments in technology

Why has it become so crucial to consider proactive collection measures?

Being a CFO, adopting a proactive strategy now will not only create a positive experience for your customers but for your team as well. Having this proactive mindset can change the way your team collects cash from customers, which in turn changes the way your customers view and interact with your business. This improves payment behavior in the long run as it strengthens customer relationships and deepens trust.

Collections is never an easy process. Let’s look at some challenges faced by mid-sized companies when they rely heavily on traditional collection practices.

10 Questions every CFO should ask about proactive collections management

1. What are the key strategies involved in proactive collection management?

Proactive collections focus on leveraging technology to predict invoice payment dates, identify at-risk customers, and generate prioritized worklists. This helps transform collections into a data-driven process.

Let’s look at some key strategies to ensure best collection practices.

  • Send out invoices instantly
  • Customer segmentation
  • Making payments easier for customers
  • Automated dunning

Anchoring proactive collection strategies in your collections system will not only help in getting your customers to promise to pay but will also improve the overall process efficiency and help optimize working capital.

2. How does proactive collections improve cash flow and reduce DSO?

Since cash is oxygen for any business, the sooner the company gets that cash, the stronger its cash flow and DSO is likely to be. As a proactive approach, collections teams should correctly prioritize accounts, prepare call scripts, and perform aging analysis before calling up any customer.

Furthermore, slow or inefficient invoicing processes can also lead to increased DSO. Therefore, it is all the more important to ensure that invoices are going out on time, contain all necessary information, and are free of errors.

eInvoicing and ready-to-use templates for DSO calculation can provide businesses with insights about the best possible DSO metrics based on industry-level benchmarking.

3. How to stay on top of critical at-risk accounts?

Inadequate means to identify critical accounts leads to disorganized client communications and unnecessary focus on low-risk customers. As a result, analysts spend their valuable time reaching out to customers who usually pay on time.

The best possible way to target critical or at-risk accounts is by categorizing or segmenting them based on:

  • AR aging reports
  • Past payment history
  • Payment amount
  • Credit risk profiles

Collectors can then get clear visibility about who they need to contact first. They can also get insights into when and with whom they need to adopt stricter collection strategies. Proactive collections from accounts with a high risk of delinquency can reduce DSO and lower the risk of write-offs.

4. How can delinquency be reduced in the early stages of the collections process?

Dunning or sending periodic reminders can ensure that your accounts don’t become delinquent. Setting up a well-defined collection system and sending out automated dunning letters via emails will give you more control over the collections process.

Despite the availability of new technologies to optimize AR, many SMBs continue to use spreadsheets. In this case,  Excel-based collections and dunning automation tools can help them collect more without hindering the customer experience.

5. Why is tracking  KPIs, such as Collection Effectiveness Index(CEI) and Average Days Delinquent(ADD)important?

Collection Effectiveness Index(CEI) and Average Days Delinquent(ADD)

Tracking KPIs such as CEI and ADD can give you a comprehensive view of your AR performance and a clearer understanding of where and how your team’s performance can be improved. With proactive collection principles, tracking these metrics frequently and over shorter periods will provide up-to-date insights to maximize your collections performance.

6. How does reporting and analytics impact the collections management practices?

Reporting and analytics help summarize the key metrics associated with the client accounts. Automated reporting helps save time and effort while Excel-based reporting systems are often highly mundane, manual, and challenging.

With proactive strategies and intelligent AR automation solutions, you get actionable insights by analyzing data across all critical working capital metrics through interactive dashboards. This will also help your collections team to make more data-driven decisions.

7. How to stay on top of disputes and avoid bad debts?

An accelerated and efficient dispute resolution mechanism is possible only when both the collections team and the deductions team work collaboratively. With proactive dispute management, one can effectively view, manage, and strategize disputes related to missing or late payments, credit limits, or incorrect and disputed invoices. This also makes client communications and payment collections process more transparent, allowing you to better interpret your cash flow and finances.

8. What are the best practices to ensure easier payments for customers?

An important step in your proactive collections strategy is to remind analysts to contact a customer on the very first day a payment is late so that they’re aware of the overdue balance and can take the necessary steps to pay.

This is where eInvoicing and digital payment systems further help centralize and resolve billing and payment issues. For example, you can configure your invoicing software to follow up with customers on the first day the payment is due.

At the same time, setting up a self-service portal will empower customers to access and manage their invoices and account statements, raise disputes, and make payments. Giving your customers an easy platform for discussing issues leads to faster conflict resolution and improved customer satisfaction rates.

Best practices to ensure smooth payment collections

9. How can collectors effectively dial-for-dollars to stay on top of customers?

As a proactive approach, before making your next collection call, you must take some time to:

  • Collate a list of debtor excuses and good rebuttals.
  • Include specifics of the debt such as exact amount owed, terms, products/services purchased, due date, backorders, etc.
  • Write the above info on file cards and group them by category.
  • Exchange ideas with team members and other stakeholders.

These best practices will help you understand the customer’s history with your company. Whatever the case, knowing the customer before you call will help plan your best approach.

10. How does better access to real-time data help?

A high volume of invoices and an increase in the client base make it difficult for your collectors to keep track of payments, customer history, and backup documentation. Besides, the lack of access to real-time data makes it troublesome for teams to process receivables effectively and on time.

A centralized repository can act as a cross-functional service for AR teams that need information. This eliminates the issue of communication barriers between the teams and enriches workflow efficiency. This will make collaboration easier as well as help maintain proper visibility, get access to real-time data, and improve process transparency.

Benefits of a Centralized Repository

A way forward

Collections at first can seem to be a very painstaking process. But over the decades, there have been significant advancements in collections management using automation technology. However, without the right software tools and strategies, your collections process may not be as efficient and effective as you would like it to be.

Learn more about the Collections Best Practices that Mid Market Leaders are betting on in 2021.

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