Accounts receivable collection at many companies is still done the way it was in the green eyeshade era, leaving a great deal that can be done to improve results. Like many repetitive processes, collections is a “production” operation, and can be “re-engineered” to improve cash flow, reduce DSO and slash the disputes that result from letting unpaid accounts go stale.
Cash flow is the lifeblood of every business and success or failure depends largely on how this most important accounts receivable asset is managed. Collecting receivables more quickly enables companies to reduce bank borrowing, invest more in growth, and improve profits too.. Our experience is that the level of delinquencies can be dramatically reduced, cut in half or even better with some planning and effort. Here are some basic ideas to implement in your organization.
- Credit and Collection Policy. Every company needs a credit and collection policy which gives the department the appropriate framework in which to work. This policy should be developed by management – detailing the criteria and the tools which will be used (restricting credit, collection agencies, lawyers, etc.). Establish standard policies and practices in your organization for yourself to handle. If you are a small company, even a one page credit and collection policy may be enough. Larger companies need to go into much more detail.
- Advise the Customer of Your Policies. The customer should receive a written explanation of your credit and collection policies; that is, how you expect them to behave. Ideally, make it part of your Credit Application, but always email it afterward so they understand the rules of the game.
- Credit Application. Use an automated credit application system which incorporates your policies and other agreements, utilizing e-signatures so you have an official signed agreement. This will save you countless hours that you can spend collecting.
- E-signatures. If you need documents signed, check out the many electronic signature applications, and forget faxes. We use a service called DocuSign, but there are a number of such companies. It is extremely easy to use, and e-signatures are legally binding. This accelerates and simplifies getting any agreements signed.
- Zero-Sum Result. Many companies wait until the customer is seriously past due before making the first Collection contact. This is a zero-sum game: if you do not collect what you are owed, the customer can use your money for free working capital, or more likely they pay another vendor who was more aggressive in their collection follow-up. Your customers will learn from your practices.
- Good Customers Need Attention Too. Many large companies use software to optimize their A/P Payments – they track how well you follow-up, and pay you accordingly. Small companies follow the same practice without the software – they pay you based on how you train them to pay you through your everyday collection action..
- Letter templates and Call Scripts. How much do you want your staff to exercise their inner artiste? It depends on the experience of the individual, of course, but generally the answer is “little to zero”. Do not leave it up to staffers to come up with their individual communications standards. This includes collection letters, voice mail messages, and collection scripts. Standard templates meeting best practices should be developed, and used by all. Our advice is to skip written snail mail letters, except when you need to give official notice, certified mail, etc. Do not leave it up to individuals to make up their own policies and rules about how frequently the customer should be contacted for money and what the proper contact protocols should be. Most people do not like to ask for money; consequently, left to their own devices, they may not call with the consistency required to have effective collection function.
- Systems and Workflow. If you have sizable receivables outstanding or many customers, or if you still use spreadsheets, you must acquire a workflow system to manage collections and automate the routine tasks. See Carixa for an idea of what a comprehensive, integrated “Software as a Service (SaaS)” system can do for you. You are virtually guaranteed faster collections, lower DSO, fewer delinquencies – as well as reduced overhead- if you deploy this powerful collection software. As with all SaaS offerings, it is internet browser based, so there is no software to install or hardware to purchase.
- Contact Data. Your customer contact data should always include the email addresses of your payables contact, controller, and management. If the customer is a small company, you should also have the owner’s cell phone number. All of this information can be picked up on your credit application for new customers. Otherwise, it is a project.
- Email vs letters? There is no contest – email is immediate, and less work, but just as with form letters, you need to use pre-formatted collection emails.
- Make Paying Easy. Offer multiple ways to pay, including ACH and credit card with your smaller customers. Intuit QuickBooks, for example, has a very effective and free ACH offering for e-billing and a payment module that integrates with QuickBooks.
- Train Your Staff. A bit of training and role playing can improve results dramatically. Get outside help if needed.
- Collection Activity Cycle. Don’t wait as long as your competitors to make the first collection contact, and use email to your advantage. Get the money first.a. Early Intervention. If a large invoice will be coming due, it’s worthwhile to call in advance of the due date to solve any problems delaying payment. And, don’t be shy about sending “friendly reminders” at even 5 days.
b. If you did not receive a response to a call or email, follow-up every two-three days until you get a response.
c. If your customer is a smaller company, escalate a more serious collection matter by emailing or calling the customer management or business owner.
d. If a collection problem gets more serious (regardless of the size of your company) call your counterpart CEO to CEO, or CFO to CFO.
e. Track customer promises. Do not let them off the hook with unfulfilled promises. If the funds were not received the day they agreed to pay, call.
f. Expedite all communications. When sending invoice copies or other documents, scan and email them. Email eliminates the usual snail mail excuses, and you are assured that it’s reaching the intended party.
g. Use credit holds when an account is delinquent without a firm promise to pay.
h. If you are getting nowhere, assign the account to a collection agency, and refocus on those you can make progress with.
- Prioritize Your Work. If you do not have all the experienced staff you need, or systems that will do it for you, prioritize your collection activity so you are working on the receivables which offer the greatest cash flow payback. If you have an advanced system, you can also employ risk or payment scoring to assign the accounts needing first attention. You may also consider outsourcing all or part of the function to a qualified agency, which usually produces more focused and better results, and usually at less expense than full time staff.
- Assign Goals and Track Results by Department and Collector. Collections is a “production” job and you need to develop clear goals on cash and delinquency targets for the month, as well as number of daily calls and contacts (since you need to have all customers touched). Daily reporting should include calls made, promises obtained, disputes resolved, etc. Monthly reporting should roll up the daily results, plus report the financial results – Cash Collected, DSO, Delinquencies, etc. Of course, the department goals must match up against the corporate objectives from your CFO.
- FDCPA Regulations. The Fair Debt Collections Practices Act doesn’t apply to B2B transactions, but always keep in mind that you must comply with the FDCPA if you are dealing with consumers. Regardless, all customers should always be handled in a professional and consistent manner which reflects your corporate culture, even the few abusive customers.
- Collection Agencies and Outsource Services
Professional receivables organizations such as Leib Solutions offers both First-party and Third-party collection services. First- party is another name for day 1 outsourcing of all receivables under the client’s name. Generally, first-party is performed for a low service fee, often per invoice or a low percentage (even under 1% if your volume is high). Third-party is the traditional “collection agency” service when accounts get old, with fees commensurate with the age and size of collections.Uncollected invoices will eventually be written off as bad debts. It’s better that you assign them to a qualified collection agency while they are still collectible. It’s shocking how many companies wait until there is little hope of collection, telephone numbers disconnected, even bankruptcy, before calling a collection agency. This is evidence of a failed collection policy. The old saw “better to get 70% of something than 100% of nothing” applies here. It’s just common sense.
The first step in improving your company’s cash flow is to ‘take the first step’. Lay out a plan of attack or, if you want some advice, contact us. We will be happy to help in any way we can.