evp, trade liquidity solutions, SunGard's AvantGard

Driving Collector Performance with the Collections Effectiveness Index

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I attended the Credit Research Foundation’s Credit Forum this week in Denver. I always have great discussions with credit professionals at these forums about how they are managing their credit and collections efforts.  One of the topics that seems to always be of interest is measuring collector effectiveness.  A recent SunGard market study states that 44% of companies are using the Collections Effectiveness Index to measure performance.  According to the Credit Research Foundation, the Collections Effectiveness Index expresses the overall effectiveness of the credit and collections operation over time. The closer to 100 percent, the more effective the efforts. How does it work? Here is the equation:

(Beginning Receivables + (Credit Sales/n*) – Ending Trade Receivables
Beginning Receivables + (Credit Sales/n*) – Ending Current Receivables    (x 100) = CEI

n = number of months

While the use of this specific metric has never been as widely adopted as Days Sales Outstanding (DSO), it is worth considering adding it to your metrics if it is not already being monitored within your credit and collections department; essentially it speaks to the quality of the operation.

Do you use the Collections Effectiveness Index to measure your collectors? I’d like to hear from you.

evp, trade liquidity solutions, SunGard's AvantGard

Credit and Collections Automation Drives Results

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We recently undertook a study to look at global credit and collections practices. We found that 61% of the participants report that they are either not at all or only somewhat automated. Automation and workflow can actually minimize manual processing and improve productivity by helping to prioritize activity while also helping to allocate resources most prudently to the highest risk accounts. Areas in which automation are typically used most effectively are around prioritizing collections activities, dunning efforts and routing / managing disputes.

Download the market study so you can read how even small steps toward automating your credit and collections processes can lead to improved productivity, reductions in past-due A/R, lower days sales outstanding (DSO), reduced dispute cycle times and ultimately increased cash flow.

evp, trade liquidity solutions, SunGard's AvantGard

Poor Deduction Management is Leaving Money on the Table

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We recently conducted a comprehensive market study to benchmark global credit and collections practices. Our study showed that 55% of companies hold up the entire invoice once there is a dispute recorded, rather than splitting the remainder off and entering the disputed portion into a workflow process. So basically, more than half of the companies we surveyed (with revenues over $1 billion) are leaving money on the table by not segregating out the disputed portion of an invoice and collecting on the remainder.

Deduction management remains a time consuming challenge for most credit departments. Resolving a dispute almost always involves at least one other group outside of collections, with the two most prevalent being sales and customer service. However, one of the biggest challenges is often communicating across these groups and with the customer. For this reason, most companies institute some level of workflow automation that contemplates a centralized point of access for all parties.

Any deviation from a clean transaction can impact the cash settlement process, so segregating out the disputed portion of the invoice is a critical step in helping to reduce days sales outstanding (DSO) and bad debt expense associated with invoice exceptions.

Download the study to read about how changing your deduction management process could lead to dramatic changes in your company’s DSO.

Are you leaving money on the table? I’d like to hear from you.

evp, trade liquidity solutions, SunGard's AvantGard

Study Finds That Only 7% Of Companies Use Credit Scoring To Drive Collections Activities

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We recently undertook a comprehensive credit & collections study to better understand how  corporations are optimizing what is often the largest current asset on their balance sheets, the accounts receivable (A/R) portfolio. The study showed that 88% of companies are using outdated methods to drive their collections activities. I often see this in practice – without an effective alternative, companies continue to rely on age or invoice value to drive their efforts, simply because it’s the way they’ve always done it. However, this widespread practice leads to unworked current high-risk receivables rolling into past due buckets in the short term future and can have a wider effect on credit management. But the emergence of risk-based collections offers a more effective method that is not yet widely-adopted – statistical scoring models designed to predict the inherent collections risk of a customer.

The study showed that only 7% of companies were using a credit scoring risk grade generated by statistical models as their top driver for their collections efforts. The risk grade has been proven to be a more effective tool. Our study actually showed that, of the companies that used risk grade as their primary driver, half had fewer than five collectors, and they also reported having lower past due rates than the other respondents.

Download the study to read more about how statistical scoring could help your company improve its collections effectiveness.

evp, trade liquidity solutions, SunGard's AvantGard

Credit and Collections: Partnering for Growth

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I recently attended our annual Americas client summit in Chicago, bringing together our customer community across our Treasury, Receivables, and Payments solutions to share best practices, network, and to participate in user groups and product training.

As I reflect on the many discussions I had with credit and collections professionals and the customer presentations that were delivered, I noticed a common theme amongst the customers who have been using our solutions for many years and our newer customers – leveraging vendors as a trusted partner and partnering for growth is essential to their success.

Credit and collections departments not only require, but should be demanding, the latest and greatest that technology has to offer and the services that go along with it.  Their trusted partner should not only have the expertise and experience around the product but the ability to deliver services around those products. Hosting solutions via the cloud and managed upgrade services help keep our customers on that growth path.  Subscribing to a managed upgrade service actually increases the return on the customer’s investment by ensuring they are taking advantage of the latest features and technology.  Also, since the managed upgrade service includes consultation and training services, customers are able to maintain best practices.  Credit and collections departments no longer need or should be held back by internal IT or budget challenges.

What does being a trusted partner mean to you? I’d like to hear from you.

evp, trade liquidity solutions, SunGard's AvantGard

Centralizing Credit and Collections

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Centralizing and optimizing credit and collections management delivers benefits that extend well beyond the immediate confines of the credit or collections departments. Achieving greater predictability of cash flow is vital for liquidity planning and enables borrowing and investment decisions to be taken with more confidence, with the potential to reduce borrowing cost and increase investment yield. In an environment where credit is more constrained, more difficult to obtain and more expensive to maintain than during pre-crisis days, with no guarantees of continuous market access, I feel this is an important consideration and should be a top priority for corporations.

The business case for centralizing collections can be compelling: significantly reduce overdue receivables and increase cash flows.  Reduce days sales outstanding (DSO) and bad debt; increase efficiency, control and standardization of business processes, and enhance both internal and external customer relationships. Ensure compliance to internal policies.  However, the challenges can often seem insurmountable, and frequently thwart plans to centralize collections. Some of the most common include the following:

Lack of Management Support

In companies where decision-making is divested to local management, major business change requires senior management sponsorship to help clear internal roadblocks and incentivise local management to co-operate and assist in centralization. The benefits of centralized collections are often not apparent to local management and sales teams until the new arrangements are in place, so strong sponsorship and commitment is essential. Over communication is key to driving support and gaining consensus and commitment. 

High Initial Investment

The cost of establishing a new shared service center (SSC) or migrating major activities into it can be considerable, and companies with budget constraints may find it difficult to justify major upfront investment. However, the potential advantages in reducing DSO and bad debt, and enhancing the company’s liquidity position can be considerable, and the payback period for such a period is frequently less than six months. Additionally, the investment in technology is essential for success and to overachieve on the ROI projections.

Frequent Business Change

Companies which frequently undertake M&A activities tend to believe that the ongoing costs of migrating new businesses into a centralized credit and collections unit may be not be justifiable. However, in reality, companies that have introduced shared services for collections have found that by introducing a structured approach to migration of new businesses, particularly when using a specialist collections system as opposed to an ERP, where the implications of migration are typically greater. Furthermore, companies that divest businesses have found that the value of divested assets is increased when collections are centralized, as potential purchasers have full visibility over the debtor position and confidence in credit procedures that are undertaken. Ensuring compliance to existing company standards becomes a byproduct of centralized credit and collections management.

Differences in Payment Culture, Methods and Formats

Multinational companies in particular face the challenge that collection processes in each country can differ considerably. For example, even though paper-based checks are on the decline in the United States, they are still popular. In contrast, countries in Europe have highly efficient, electronic payment mechanisms. Furthermore, the clearing systems and formats required in each country differ substantially, and the business culture for collecting cash can vary.

Maintaining a decentralized approach to collections may initially appear beneficial to address local regulatory, clearing and cultural requirements. However, with costs replicated across each collection location, and the lack of control and automation that typically results, disparate collection methods can be managed in a single system while successfully addressing the diversity of local needs. In some cases, it makes sense to retain some functions locally, such as invoicing in the case of highly specialist companies with complex orders; however, centralization does not always require all individuals engaged in the process to be in a single location. Instead, we are seeing a growing trend towards virtual, as well as physical SSCs, facilitated using central technology to ensure that global processes, controls and reporting are achieved, while still respecting the culture of the company

The use of a single technology platform can facilitate a centralization strategy that is specific to each company, that could involve one SSC, but equally could include regional or country centers, a ‘virtual’ approach or a combination. Providing a proper technology solution that allows for collaboration and visibility in and out of the SSC operation is key.

Are you thinking of centralizing our credit and collections processes or already have?  I’d like to hear about your concerns or experiences.

evp, trade liquidity solutions, SunGard's AvantGard


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What is required to collect cash on time? The answer is both simple and complex. To collect on time, a customer needs to pay on time (the simple); encouraging them to do so is rather more problematic (the complex). In the past, companies encouraged their customers to pay on time, or even early, using early payment discounts. While this may still be valid for some companies, every company is seeking to maximize its working capital, so early payment may be less attractive. So what processes should a collections manager alter to ensure that they get paid and on time?

Firstly, companies are increasingly conscious of counterparty risk, and in many cases, the process of assessing potential customers and establishing appropriate exposure limits is being reviewed, resulting in more conservative policies and lower limits. One of the issues with a decentralized approach to credit and collections management is that it is difficult to ensure that a standardized approach to customer acquisition, monitoring and limit setting is being adopted across the business. Furthermore, if different sales departments or business entities are conducting business with the same customer groups, it may be almost impossible to identify and monitor overall group exposure.

Secondly, companies need to make it as easy as possible for their customers to pay. To enhance collections convenience, it may be desirable to insist that customers pay using electronic credit transfers or direct debits, but this policy may be detrimental to customer relationships and be at odds with local payment cultures in different countries of operation. A centralized approach to collections does not mean that local payment cultures cannot be respected; in fact, by using an automated workflow solution, invoices and customer correspondence can be produced in different languages with bespoke content according to the culture in each country or the nature of individual entities. Furthermore, by using a combination of processes, technology and banking services, companies can collect cash in a variety of ways, including manual forms of collection such as checks, without compromising efficiency.

Thirdly, companies need to be proactive in seeking prompt payment. Sending an invoice and expecting it to be paid is not enough. Invoice disputes and queries need to be dealt with quickly to avoid payment delays. In many companies, this is managed by a customer service team or even the sales team, and there is no central visibility or accountability over the query resolution process. Making use of technology that enables a single view of each customer, invoice and status, with automated follow-up actions facilitates the process, ensures personal accountability and central visibility. Another element of collections proactiveness is the ability to remind customers that an invoice is due or better yet coming due. Often, particularly in a decentralized environment, this involves a call from the finance team to sales, who then chase payment. This often takes place long after the collection was due, and gives a negative impression to customers. In contrast, establishing a centralized, automated process for sending customized payment reminders before due date, as well as afterwards, can be an important way of ensuring that collections are on time. Furthermore, a professional impression is created with customers.

Are your credit and collections processes centralized or decentralized? I’d like to hear from you…

evp, trade liquidity solutions, SunGard's AvantGard

Beverage Distributor Improves Its Credit and Collections Processes

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I often get asked to share best practices from companies who have automated their credit and collections processes.  I thought I would share with you results from a well-known beverage distributor, The Heineken Group.  The Heineken Group operates in 170 countries and sells more than 250 brands of beer.

In January 2010, The Heineken Group set up a Group Credit Management team and also implemented automation technology and workflow to improve its credit and collections processes.  After two and a half years, late payments declined by half, days sales outstanding (DSO) improved by 21 percent, and litigation decreased by 65%.

You can read more about their project here.

Are you looking to automate your credit and collections processes? I’d like to hear from you.

evp, trade liquidity solutions, SunGard's AvantGard

Automation Improves the Five Stages of a Collections Cycle

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Now more than ever, collectors are finding themselves unable to perform their jobs effectively because they do not have the right tools.  Instead of spending their time with the customers, they are chasing down information, and re-organizing the information so that it is in a format they can use, and in many cases, toggling between an A/R system or worse multiple A/R or ERP systems / instances, a spreadsheet program and a slew of paper.

The benefits from fully automating the credit and collection process are transformational.  Rather than spending most of their time gathering information and documenting problems, collectors using an automated collection system are able to devote the bulk of their time to contacting customers that would be or already are overdue customers.  The result of this renewed focus on a collector’s core responsibility is, not surprisingly, much improved corporate collections.

In effect, automation provides collectors with a scarce commodity – time.  The primary advantage of a fully automated system is the capacity to contact two, three or even four times as many accounts each day. Since we all know that many customers pay not when they are due but rather when they are contacted, the more contacts a collector can make, the more cash they will collect. There will be a sharp increase in calls and mass correspondence sent. As a result, companies that automate collections can realize an immediate and substantial increase in cash received and an on-going improvement in all measures of collection performance.

The collection cycle consists of five distinct steps: prioritizing, preparation, contact, follow-up, and reporting.  By eliminating or automating many of the clerical activities that consume so much time within these stages, collectors will have more time to spend making contacts.  An automated system helps facilitate the process, bringing organization and strategy to each step.

Determining which accounts to work on, who to call first, and when to send correspondence is critical to an effective collection system.  When prioritizing is performed manually, it takes a considerable amount of time and the outcome is often inconsistent.  Valuable time is often lost in the very first step of the collection cycle.

Gathering information and resources will enable collectors to effectively and intelligently ask their customers for payment.  If this information is not available from a single location, the collector will need to spend extra time hunting and gathering in preparation of each contact.  An automated system can bring organization, classification and categorization to this step.

Making the Contact
This step is central to an effective collection operation.  The more contacts that can be made, the faster the money will be collected.  Contacts can be made on several different levels.  Depending on the situation this may mean a personal call, a fax, email, letter, statement or voicemail message.  It is unlikely that a single method of contact will get the job done, so there should be guidelines indicating a strategy of how and when the different tools should be used.  By instituting a strategy, the results can be evaluated periodically and the methods can be adjusted as necessary.

Without effective follow-up procedures, a collector’s efforts at making contact can be rendered a waste of time.  Follow-up includes every activity that is necessary to consummate the collection.  Ideally, follow-up activities will be executed during the contact process, while the customer is still on the line, or within seconds of the call’s termination.  Many of these clerical tasks can be automated, freeing the collector to make more contacts while ensuring that this crucial step is completed.

Without feedback, it is impossible to measure the effectiveness of the collection function.  The data organized during the reporting phase of the collection process provides valuable information that can be used to adjust strategies in the future.  In order to obtain the maximum from collection efforts, it is vital to put into place a systematic approach to evaluating the effectiveness of your system and activities.  This information will also prove to be of value to the sales and customer service organizations.  Using dashboards reports, collectors will be able to better prepare for the next contact, which will in turn, improve each step of the collection process.

Are your collections processes still manual? I’d like to hear from you.

vice president, product management, AvantGard, SunGard's corporate liquidity business

Five Best Practices for Credit and Collections

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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.