Most industries, apart from those that deal with consumers, work on a trade credit model. Suppliers and buyers enter into an agreement that refers to “payment terms” which dictate the conditions under which a seller will complete a sale. Depending on the industry, payment terms may vary widely from ‘payment in advance’ to payment ‘90 days after the invoice date.’
In an ideal world, suppliers wouldn’t need collections teams as buyers would pay ‘in full and on time,’ every time. However, a survey revealed that 48% of customers do not pay on time and businesses lose 52% of the value of receivables for invoices which are more than 90 days past due. To keep close tabs on the health of their receivables, finance departments have relied on a key metric – DSO.
A higher DSO implies lower cash on hand, therefore requiring companies to rely on borrowings to fund operations and keep business running. Collections teams are therefore necessary to maintain a low DSO, as they help convert receivables into cash and assist the finance team to reduce borrowing costs.
However, as most readers would agree, credit collection is no mean feat. Despite all the advances in technology, collections continue to heavily rely on old-fashioned dunning correspondence to remind customers and creditors about invoices that are due, or already past-due. Growth in businesses, through organic and inorganic expansion, has only meant more demand. This has led directly to more transactions with an ever-rising number of customers. The collections challenge is not going away.
A great deal of insight into the future of collections management could be gained by looking at how collection processes have evolved over the years. The rest of this chapter takes a closer look.
While the collections team deal with several kinds of customers depending on the industry in which they operate, there are a few common collections challenges that occur across all industries:
This is the most common problem faced by collections teams worldwide. Most collection managers find their teams overstretched. However, even adding more resources is not necessarily a perpetually scalable solution. With growing businesses and receivables volume, the number of overdue receivables also keeps on increasing across various geographies. While the initial positive impact in terms of DSO reduction may be visible with the onset, the costs of a constantly growing team will soon be unable to justify the results. Organizations will not be able to afford to add resources to dig into the mounting receivables volume.
Collections analysts, therefore, are always challenged by their single biggest responsibility of reaching out to customers. Studies show that collections teams have struggled with customer correspondence and close to 70% of collections calls go to customers who would have paid even without dunning notices or telephonic reminders.
Timely access to accurate data could greatly improve the effectiveness of collections operations. However, siloed systems and poor collaboration have meant that collections teams continue to lack the necessary means to improve efficiency.
Most collections analysts spend at least 30% of their time catering to such ad-hoc requests given that the requested information is scattered all over the place. For example, downloading a proof of delivery document requires analysts to go to the carrier website, enter tracking numbers and then download the required materials. Declining ad-hoc requests from customers is not a solution, as it is only likely to delay payments. The solution has to be sought that brings all the necessary information to a single place for collections analysts to access and serve.
While some teams and companies innovate with new processes and systems, others fail and falter as they continue plying old solutions to very new and unique problems and challenges. Due to the sweeping changes over the last few years, many teams are unable to deliver the results to which their previous finance teams were accustomed hence calling for a change.
Figure 5: Types of Collections Management Systems
While companies are diving in to employ the latest collections management software, it is important to obtain a very clear understanding of the different types of collections management solution available.
Receivables Master Data Management Systems
The most basic type of collections management solution will help the teams gain a consolidated view of all the customer accounts along with important information related to open invoices and customer contact personnel. This kind of system is most useful for teams that already have a solid communication execution and tracking platform in place. The primary purpose of such systems could be to help analysts review the data and manually prioritize and create their account lists for collection.
Dunning Activity Management Systems
The next level of the solution includes functionality provided by receivables master data management systems described above, but also handles dunning activity. These systems serve as a means of record-keeping to track all collection activity and correspondence. Some of these systems are also able to help collections team leaders to define strategies and rules based on various collection scenarios, which are executed by the collection analysts in the course of their work.
Correspondence Automation Systems
Considering that correspondence is the single most important activity performed by the collections team, it becomes justified that there exists a type of system that caters to this particular requirement. Ideally, a correspondence automation system should handle and maintain multiple correspondence templates that are needed by the collection analysts. In addition, these systems should perform correspondence activity across mediums including print and mail, email and fax, as well as keep track of all phone-based collection touchpoints. Compared to the previously outlined systems, these solutions are completely capable of automating manual work involved in creating correspondence, selecting accounts and contacts and then sending out emails or dunning notices.
Integrated Collections Management Systems
One of the challenges discussed earlier was how collections teams end up working in silos, isolated from key information that is crucial for successful collection outcomes. An integrated collections management system should be capable of linking all data-sources across the receivables domain – including deductions, disputes, payment processing and invoicing – and be able to present a single source of truth for collections teams with which to work. Organizations are already leveraging integrated collections management systems to free up their teams from the manual work involved in preparing collection lists, sending out email correspondence, searching for information and documentation from different teams and keeping track of overall collections activity. This automated process allows teams to focus on the most high-touch aspect of collection activity that involves dunning via phone.
Collections Management is indeed one of the most complicated of the accounts receivable processes. Further, leaders in the Collections Management field are faced with multiple challenges – both internal and external. However, most collections leaders identify correspondence management and correspondence automation as the lowest hanging fruit towards effectively transforming receivables operations.
The next chapters focus on correspondence automation and explain how the approach towards customer correspondence requires a drastic overhaul.