The accounts receivable (AR) collections process is an essential cog in the wheel of every business that extends credit to its customers. The process can be complex and time-consuming, requiring attention to detail and communication skills. Despite its importance, many businesses struggle with collections, leading to cash flow problems and reduced profitability. In this article, we will explore the AR collections process and share five collection strategies for turbulent times. We will also consider the role of technology in streamlining the collections process and improving outcomes for businesses of all sizes.
In simple terms, AR collections are the processes and procedures that a business undertakes to collect funds that their customers owe them for goods and/or services provided on credit.
The accounts receivable process begins with extending credit to customers, resulting in debt expected to be repaid within a specified timeframe after receiving the goods or services. Once the customer receives the goods or services, the AR team sends an invoice for the amount owed, and the clock starts ticking on the payment term. Payment terms typically range from immediate payment upon receipt of the invoice to 30 days, 60 days, or even 90 days.
As the payment due date approaches, the business monitors the aging report. This report is a snapshot of clients in good standing and those with unpaid invoices. A typical AR aging report features the total owed by the customer and then a breakdown into aging categories (30-60 days, 60-90 days, etc.). Businesses can utilize this report to begin their collections procedures for accounts receivable.
Accounts receivable collection procedures typically begin with sending the customer a payment reminder or past-due notice. This notice can be sent via email, physical mail, or phone.
If the customer does not respond to the reminder notice, the business may escalate the collections process by sending a demand letter or making a phone call to the customer. This conversation can be difficult, especially if the customer faces financial difficulties or disputes the amount owed. However, it is crucial to maintain a professional and respectful tone throughout the conversation to avoid damaging the customer relationship.
In some cases, the collections process may escalate further to involve legal action, such as sending the debt to a collection agency or initiating legal action (filing a lawsuit). However, this should be a last resort since legal action can be costly, time-consuming, and may damage the business's reputation. Instead, businesses should focus on proactive collection measures, such as establishing clear payment terms, following up with customers regularly, and leveraging technology to streamline collections.
Featured Resource: The Collections Playbook
The COVID-19 pandemic forced organizations to move their business practices online quickly, set up digital communication and commerce channels, and figure out how to support backend processes when staff couldn’t go into the office. Combined with the market conditions of more and more businesses failing, unable to collect payments, and unable to hire a qualified workforce, it’s fair to say that the current times are turbulent.
Here are five strategies that will help you minimize the turbulence and manage your risk.
1. Leverage customer data for a deeper understanding of your business
Use a payment platform that pulls data from your ERP, accounting software, or CRM together and presents it in a way that’s usable. Utilizing a smart AR platform will enable you to analyze data and gain insights into the current health of your business, as well as where your customers' business health stands.
Accessing your data and leveraging it to better understand your customers will help you make decisions about how to interact with those customers, as well as the policies and processes you put in place to best serve them as well as your business.
2. Use forecasting to create and support your plans
Forecasting is crucial for understanding your cash flow and identifying risks or opportunities for growth. Use accurate forecasting reports to understand what's happening in your business and develop mitigation strategies for any risks exposed.
3. Ditch the paper, digitize the process
Slow manual processes delay communication and payment. Streamline your invoicing process by utilizing electronic invoicing options like email, online portals, or mobile payments. This will improve your cash flow and enable your customers to respond more quickly.
4. Automate the payment process
When it’s easy for customers to pay you, and they have flexible options for how they pay you, you get paid. Meet your customers where they’re at and where they are doing business. Online portals allow them to access and pay invoices at any time. Offering flexible payment options, such as credit card or ACH, can also reduce late payments and increase access to cash. Although there may be fees, the benefits include faster payment and happier customers.
5. Communicate, communicate, communicate
A smart collections communications strategy focuses on consistency, personalization, and automation to build trust and strengthen relationships. Consistency means regularly communicating with customers to build trust and keep them informed. Personalization helps customers feel recognized and valued. Automated communication saves time and money and can be used for payment reminders, inbound requests, repetitive processes, and process clarity.
Automation is a valuable strategy to support your business whether you’re looking to reduce costs, improve efficiency or decrease your Days Sales Outstanding (DSO)
Download our white paper 5 collections best practices to minimize risk in turbulent times to learn more.
In today's turbulent business environment, improving collections practices can result in substantial benefits in terms of cost reduction, efficiency, and cash flow. By utilizing data, automation, and effective communication, companies can reduce the cost of invoicing by up to 94%, improve their Collections Effectiveness Index (CEI) by up to 20%, increase their AR team's efficiency by up to 3X, and boost cash flow by up to 26%.
With the COVID-19 pandemic leading to a distributed workforce and limited in-office interactions, it’s crucial to have a centralized, cloud-based system for managing back-office functions. AR and collections teams require access to various AR systems and data sources to perform their jobs effectively, including communicating with each other and customers. Unfortunately, collections are often overlooked when companies evaluate their AR process, even though it has become increasingly important due to the pandemic.
According to a recent study by PYMNTS and American Express, 44% of businesses have struggled with collections since the onset of COVID-19, with DSO increasing from 39 to 43 days. The pandemic has had a significant impact on payment acceptance (47%), customer credit checks (45%), and collections (44%) processes. Furthermore, following up on payments manually takes 67% more time than an automated process and incurs added costs of between 1-3%, eating into profitability.
Companies should focus on the five collection strategies we’ve covered here to minimize risk during turbulent times. These strategies will not only support improvements in your credit-to-cash process but will also directly and significantly impact your overall business.
If you are among the 54% of innovative business leaders who plan to invest in a more efficient and cost-effective way to manage their credit-to-cash process, then you’re taking a closer look at your collections process and realizing that improvements here can go a long way to accelerating your cash flow, improving customer loyalty and ultimately, scaling your business for future growth.
While the pandemic and market conditions have made the times turbulent, businesses can minimize the risks and manage their accounts receivable collections effectively by utilizing the five strategies outlined here. With these strategies, you can optimize your collections process and improve your cash flow while building stronger relationships with your customers. Using automation technology to streamline the collections process will improve business outcomes, save time, and improve the customer experience.