improving the credit and collections process

8/11/2019 Improving the Credit and Collections Process

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Document the steps you take to improve each impediment and create graphs to track your

performance in each area.

Step 2: Implement an Appropriate Credit and Collections Strategy

Credit and collections is an integral part of your total customer relationship strategy. You cannot adopt

one strategy for all customers and you certainly should not adopt adversarial tactics that put undue

pressure on your customers. Instead you want your customers to want to do business with you, even if

they know they are paying you later than you want.

You have to decide when to contact customers and more importantly what credit and collections

approach you are going to use. If you start the credit and collections process too soon, you might

negatively impact the relationship you have with your best customers. If you wait too long, you may be

investing funds in Accounts Receivable (AR) that are desperately needs elsewhere.

Extend credit (time) to your best (most profitable) customers.

Contact habitually late customers sooner.

The underlying objective of any credit and collections strategy is changing a customers payment

behavior. If you do nothing to change this behavior, then you just perpetuate the problem every time

you send them an invoice.

Make sure management and your sales team buys into your credit and collections strategies.

All collections activities should be an integral part of your larger customer relationship management

(CRM) strategy.

Make sure members of your credit and collections staff understand how they should conduct

themselves.

Devise management oversight procedures. This is particularly useful when monitoring the success of

each credit and collections staff member. You might find that specific individuals may not be doing

quite as well as others.

Step 3: Adopt Effective Credit and Collections Tactics

Having devised an overall strategy and enlisted organizational support, what should you do specifically to

achieve your credit and collections objectives?

Keep in mind the fact that each time you toucha customer there is a cost associated with that

contact. Your overall objective is to optimize the cost per dollar collected.

Statements and dunning notices are low cost touches as long as customers respond. For those that

do not respond, a phone call may be the best first contact. This of course requires that you track

each customers response so you know who responds to what credit and collections tactic. If a

customer does not respond to dunning notices or statements, it makes no sense to waste your

valuable time on these fruitless activities.

Dunning notices should list each invoice, the total outstanding and an expected pay date. If possible

the dunning notice should contain text asking for payment while at the same time thanking the

customer for their business. This carrot and stick approach is more effective than a notice that

appears to be blunt and forcing.

Dont use the same trigger point (e.g. 60 days overdue) for all customers. Good customers who pay

their bills on time and generate substantial gross margin should be contacted less often than

customers who are less profitable.


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If you are going to send statements and dunning notices, you can program these activities into your

credit and collections application on a customer by customer basis. Of course these activities will

occur automatically and should be added to the contact record for each invoice.

If a personal call is the next step in the credit and collections process, the planned call will be

automatically placed into your credit and collections contact manager.

If you are a larger firm with multiple people involved in credit and collections, the system would assign

the call to a collector assigned to that customer or region.

The credit and collections application should contain the names of all appropriate customer contacts

(keeping in mind the fact that the people you are going to call are probably not the people who will be

called regarding sales and marketing).

When you make the call all of the information relevant to each overdue invoice is one click away

(including sales order details).

All of the information regarding the customers past payment history is available.

If a customer has multiple overdue invoices, you can see each invoice and automatically copy contact

details to each invoice. This is particularly effective when the objective of your call is securing

payment for a number of invoices rather than a single or limited number of invoices. As an example ifthe customer has 20 overdue invoices totaling $25,000, the objective might be securing a $20,000

payment.

You can take notes regarding the call.

You can assign a next contact date.

If the invoice needs to be escalated, the credit and collections application will allow you to transfer the

responsibility to another person. This transfer process could also be utilized to cover vacations and

other absences.

Once an invoice has been paid, the credit and collections application will automatically delete the

next planned call relating to that invoice.

Credit and collections specific histories will be available so you can more effectively plan your creditand collections strategies and tactics.

This list of activities is just a summary of whats possible when your credit and collections efforts are

software supported.

Searching for a New Accounting System or ERP System?If you are contemplating the purchase of a new accounting system or ERP system, keep in mind the fact

that a software supported credit and collections application can help you reduce your Accounts

Receivable (AR) significantly. If you are a $50 million organization and credit and collections is an issue

(AR is way too high), a slight reduction in AR (say 3 days) has the potential to generate a one-time cash

flow of $135,000. Since you will need to justify the investment in a new accounting system or ERPsystem this cash flow can be used to reduce the Total Cost of Ownership of the contemplated accounting

or ERP system.

If you are in the process of selecting a new accounting or ERP system (or might do so at some point in

the near future) you might want to contemplate the use of a software selection tool likeThe Accounting

Library.As you are defining your functional requirements, you can specifically search for a system that

features software supported credit and collections.
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SummaryAR can be reduced, sometimes significantly. Rather than applying the exact same tactics for all

customers, determine how you are going to handle each customer, but always remember that credit and

collections is an integral part of customer relationship management. Your actions must help your firm

manage receivables effectively as well as support your firms sales objectives.

Improving Accounts Receivable Collections (Part 2 of

6): Prioritizing Accounts Receivable Collections

ManagementOver the next several weeks, were pleased to host a series of blogs authored bye2b teknologiesaimedat improving your ability to collect accounts receivable. In addition, on April 10, e2b will be hosting a freelive webinar entitled 6 Steps to Developing a World Class Bus iness Credit Policy & Collections ActionPlan.You can sign up here.

Two things are true for most businesses:

1) a significant percentage of sales (and therefore receivables) are concentrated in a small percentage ofcustomers

2) they have insufficient staff resources to contact every customer about past due payments.

Suggestion: adopting a collection strategy orcollections management software systemthat identifiespriority accounts for ongoing personal attention and uses efficient automated processes to contact theothers.

Start by creating a Top 20 list that is composed of these priority customers. Usually about 20% of youractive customer base accounts for 80% of the activity and you should focus your limited collectionresources on these customers where personal contact will have the maximum impact. The number of

customers on the list will be determined by your available staff resourceshow many relationships canthey manage given the time they have available for collection activity?

Create the list by evaluating accounts across several dimensions:

Account balance. Obviously, large amounts are your primary focus. Payment history. Are they slow and erratic payers or do they pay consistently without the need for

reminders? Purchase history. You have more leverage over customers that purchase frequently and who

may be dependent on your for products or services that are critical to their business. History of interactions. Are they easy or difficult to work with? As painful as it may be, limited

resources should be directed at the tough collection situations.

General collection risk. A high-level assessment of a customers ability to pay based on their

industry and location will also come into play. Specific collection risk. Likewise, company information (e.g. length of time in business) is also a

predictor of collection rise. Profit margin on sales. Low margin accounts are high priority because carrying costs erode profit

so the sooner you collect the better.

Determine who is on the list by analyzing aging reports and history of customer activity and interactions.A collections automation tool likeAnytime Collect would be helpful in large, dynamic environments bybringing all this information together in one place. The actual number of accounts that can be managed
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will depend on the collections staff resources available. The list should be reviewed at least quarterly toreflect changes in your account base (new customers coming on board, old ones that stop buying).

Once you have the list you can startmanaging collections more effectively.Learn about them. Document their purchasing and payment history. If they are a large company thatalways pays in 60 days set that as your expectation. If they have specific paperwork requirements to getan invoiced processed through their system be sure the people in your organization that do the billing are

aware of them.

Identify key personnel. Identify and build relationships with the individuals at each customer whoare involved in the payment processAP clerk, approving managers, CFO/Controller, etc. Obtainaccurate contact information and determine their preferred mode of contact. Some people preferemail, others like faxes or phone calls.

Establish policies for collections. I have talked about collection strategies and variations on thosestrategies in previous posts. Be open to establishing highly customized strategies for collectingfrom your largest customers. Adapting to their procedures and protocol will be a big help inmoving paperwork through the system.

Monitor changes in payment or purchase activity. A slowdown in payments could be a signal offinancial trouble at this customer and bears watching. Large purchases that are outside ofprevious practices should also be watched. Pay particular attention to new customers thatsuddenly make a significant purchase. Call before and invoice is due in these situations to verifythat it is legitimate and will be paid in due course.

Automate contacts with the 80% of customers who are not on this list. Identify key personnel. As above, identify the individuals at each customer who are involved in

the payment process. Accurate contact information is essential. It is important to know thatmessages are getting to the right person.

Establish policies for collections. As above, define specific actions to be taken at milestones inthe collection of a past due account. If possible, use an automated process to identify past dueinvoices on a daily or weekly basis. Remember, you dont have to follow up past due invoices at30-day intervals. Particularly as they get older more frequent contact is appropriate.

Standard document templates. Develop a series of standard collection documents with specificand escalating messages to support collection actions. Ideally, these can be sent out through amail merge process.

Vary communication methods. Alternate the method of communication (email, letter, and fax) inorder to maximize the likelihood that the message will get to the intended recipient.

Monitor delivery failures. Investigate any communications that bounce. Personnel turnover ortransient technical issues can lead to an email not being delivered and a follow up call is in order.Returned mail is a serious issue and requires immediate escalation.

Consider outsourcing. Many third-party collection agencies are expanding their services in thisarea and can represent you as a first party for these non-critical accounts. Generally this entailsa fixed cost per account or invoice and the customer is not being put in collection. You keep100% of the payments collected but there are no guarantees you pay for the service regardless,although economies of scale make it possible for large agencies to perform these routinecollection activities for much less than you could yourself. Automated phone calls are often anoption from these sources and provide another mode of contact.

Another way to cope with limited resources is to send accounts to collection earlier. If your internal effortsare not working, call in the pros and stop wasting your time. That frees up time to be directed towardsaccounts where the interaction can make a difference. This applies even to priority accounts, though youmay want to take care in referring such a customer. However, a good agency should be able to getpayment from a customer without blowing up the relationship. When you are considering engaging anagency make sure that they have experience in commercial collections. The techniques used forcollecting consumer debt do not all carry over well to collecting from a business.
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A short overview demo and a longer video (available in two parts) is available on our YouTube channel.Take just three minutes to see for yourself what Anytime Collect can do for your company.

Our goal is to help you succeed through new technologies that make sense for your business. AnytimeCollect will help you automate how you manage one of your largest assets your accounts receivable.

Pleasecontact us for more information,a personalized demonstration, or details regarding special pricing

for Anytime Collect.

Live Webinar

6 Steps to Developing a World Class Business Credit Policy & Collections Action Plan

Accounts receivable is typically the largest or second largest asset for most businesses yet mostcompanies do nothing to improve their credit and collections processes. This presentation will outlines sixeasy steps to developing a world class credit policy and collections action plan to help you gain significantadvantages in your business to reduce days sales outstanding (DSO), improve cash flow, and reduce baddebt write-offs through best practices and automation.
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