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One of the top priorities of CFOs and finance leaders across industries is working capital management. Accounts receivable teams aim to leverage their collection efforts to impact cash flow, mitigate credit risks, and reduce the cost of borrowing by lowering DSO, reducing the number of past due invoices, and eliminating write-offs.
In our experience with over 350+ B2B SME suppliers, a common observation has been that companies usually rely on their basic ERP functionalities and work with the golden rule of 80-20, thus leaving a big slice of their accounts receivable on the table. Therefore, the need of the hour is for organizations to develop collections strategies that increase the process effectiveness and help CFOs achieve their long-term objectives.
The right approach to developing a collection strategy begins by identifying the right objectives for your collections team. As an A/R manager, you need to ensure that your collections team has the following three goals:
While basic collection strategies and ERP functionalities could help you achieve the first two objectives, your AR team will end up wasting time and effort on the “wrong” customers, thereby increasing the cost of every collection effort.
Suppliers need different collection strategies, depending on their customer base. While developing these strategies, it is important to understand that a one-size-fits-all approach can’t be applied to buyers across different sizes, industries, and business relationships.
A very important criterion to develop collection strategies is for the company to KNOW THE CUSTOMER!
Understanding the customer, in more technical terms, is what organizations refer to as Customer Profiling. In order to collect faster from your customers, you need to be able to predict how they are going to respond to a dunning activity. More often than not, businesses have a lot of customer data at their disposal which they could convert into intelligence and translate into the right collection strategy to achieve their objectives.
Categorize your accounts receivable according to the length of time an invoice has been outstanding. The different aging buckets to be considered are 0-30 days, 30-60 days, and 60+ days. Aging reports give you an idea of how much a customer owes you, and for how long, depending on which you could develop the most effective dunning approach for each segment.
Evaluate if your customer is a fast payer or a slow payer depending on their payment history. One way of doing that is to compare the average days of delinquency with the industry average. If the ADD is less than or equal to the industry average, then the customer is a fast payer, otherwise they are a slow payer.
Based on the customer’s credit limit, payment history, amount of debt, reference checks,and related factors, you would be able to segment your customers into high, medium, or low-risk categories. The weightage assigned to each one of these factors varies from one company to another, but the overall result is imperative to determine the right collection strategy that is more likely to produce successful dunning results.
The impact of working with data-driven collection strategies can be seen in the fact that most businesses spend 25% of their effort on collecting from customers who would have paid anyway; best-in-class businesses spend less than 5%!
Collections is one of the most strategic processes of the Order-to-Cash cycle. Its impact is visible on long-term business objectives of lowering DSO and improving working capital. In order to achieve these objectives, what organizations need, beyond a proactive collections team, is the right strategy to collect from each account.
Collections has a direct impact on an organization’s finance objectives as well as its relationships with customers. Hence, collection strategy is not just about collecting money faster but also prioritizing relationship management and ensuring that your collection efforts deliver the biggest bang for your buck.
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HighRadius Collections Software automates and optimizes the credit & collections management process to improve collector efficiency, minimize bad debt write-offs, improve customer relationships, and reduce DSO. It provides a complete set of tools to optimize and automate the credit collections management process and enable the better prioritization of credit collections activities All the information you need (invoices, dispute information, POD, claims, tracking info, etc.) on each case is automatically presented in a collections work-space and is ready for use. Apart from the wide variety of benefits that it has, it also comes with some amazing features like CADE (Collection Agency Data Exchange), collector’s dashboard which has prioritized collections worklist, automated dunning & correspondence, dispute management, centralized tracking of notes, call logs & payment commitments along with cash forecasting functionalities. The result is a more efficient collections team that contributes to enhanced cash flow and reduced DSO.