I am still amazed that in this day in age, there are still companies using spreadsheets and manual processes to manage their credit and collections. Effectively managing credit and collections is key to a company’s financial health. Without incoming cashflow, investments and growth can all be stunted. Here are five best practices that I feel can help companies improve their processes, lower DSO (days sales outstanding), reduce past-due A/R and ultimately increase cash flow.
1. Institute a Strategic & Automated Approach to Cash Collections
Many companies continue to rely on manual processes surrounding cash collections. This can present problems, including high error rates related to data processing by hand, drained employee resources, low productivity and a lack of control over cash. By implementing technology that can automate workflows relating to collections efforts and prioritization, companies are enabled to unlock hidden cash, enhance compliance and improve customer service with greater visibility.
2. Drive Risk-based Collections with Predictive Analytics
Driving risk-based collections using predictive analytics or statistical scoring offers an alternative approach for companies that want their collections activities to be more targeted. Companies can apply a statistical model to a company’s historical A/R data, as well as information from external sources, to determine each invoice’s “collection risk,” which is the probability that it will become past-due at some point in the future. It makes sense to use a statistical model to predict specific customers’ probable future payment behaviors; determining probabilities is what statistical models do. Sophisticated predictive analytics solutions are able to assign a precise collection-risk score to each of a company’s customers, then use that score to prioritize the collections team’s contact list and determine what types of activities they should engage in with each customer.
3.Embed & Manage Risk Policy Across the Enterprise
Credit scoring is one of the most powerful tools available for automating the risk analysis that is needed to evaluate the collectability of a company’s A/R portfolio. Reasons for this include the rapid evolution of technology, as well as the tremendous amount of downsizing that has occurred in corporations, which is requiring credit and collections departments to do more with fewer resources—and make better decisions in the process.
However, too often companies are operating at a business unit level which introduces credit risk. If each business unit independently evaluates and assigns credit limits the total exposure at the top level is far more than the company realizes. Companies really should look to centralize credit risk analysis.
It is important for organizations to beware of the corporate customers that they take on for risk that they have bad payment history. Companies that are using a credit & collection workflow automation application that can combine judgmental scorecard capabilities with the power of statistical-based credit scoring are more likely to combat this directly.
Today’s receivables solutions are equipped to allow users to discover pertinent information about potential customers and assess their individual risk based on their past payment performance. From this, management can then decide how they should follow up for payment with specific types of customers. Benefits for organizations that choose to implement automation combined with credit-scoring functionality.
4.Segregate Disputes from the Collections Process
The timely management of invoicing problems can make a dramatic difference in your ability to collect outstanding balances, as it can affect your customer relationships and help tighten your operating ratio. This segregation of disputes from the standard collections process can be accomplished by instituting a system to help manage and track such problem invoices. With less disputed transactions, collection activities will be more effective, decreasing the carrying costs of receivables. Increased customer satisfaction and a more proactive approach to dispute resolution will also result in less relationship deductions, contributing more to the bottom line
To do so effectively, there needs to be distinctive strategies in place that dictate how collections departments deal with these acknowledged transactions as opposed to the ones that are in question or disputed. For example, say a customer’s total bill sums $10,000, but they argue that they were promised a 10% discount, and therefore owe just $9,000. The collector need not place the entire amount in dispute, but rather take payment for the $9,000 and then place just the $1,000 into a dispute queue. By requesting that the customer pay on the money they certainly owe and leaving the remainder to be investigated later, companies can significantly reduce their exposure to bad debt.
As simple as this may sound, most companies do not have the systems or technology in place to execute on this strategy. Corporations that choose to implement technology with the ability to separate disputes and automatically prescribe strategies to resolve problems can expect to see significant improvements including more timely resolution of disputes, as well as a reduction of bad-debt expenses.
5. Measure, Measure, Measure Your Key Performance Indicators (KPIs)
Metrics are a vital component in managing an efficient and effective credit department or shared service center. The ability to access, analyze and share information is directly linked to a company’s ability to accurately forecast, track performance, and perform root-cause analysis of customer service issues they face.
Defining the controls and policies used in the day to day operations is an important first step. However, consistent monitoring and tracking of adherence to the policies in place will assist all levels of management in optimizing the use of people and technology to create a world class organization driven by best practices. By monitoring key performance indicators defined by your company, organizations can gain a comprehensive view of compliance on a consistent basis, allowing management to certify processes, identify weaknesses, and track the effectiveness of policies and personnel.
Throughout my discussions with credit and collections professionals, most of them are measuring their collectors around common measurements – DSO (days sales outstanding), Past-due A/R over 60 days, or Collector Effectiveness Index (CEI). They are also tracking disputed invoices by defined variables such as reason, value, customer group, owner, days outstanding, or sales area. Evaluate trends and contribute to process improvement.
Do you have additional best practices that I did not list here? I’d like to hear from you.