It’s a known fact that inadequate cash flow can harm your business, and an inefficient accounts receivables collection can substantially affect a company’s cash flow. So, how can organizations confront the challenge of managing receivables effectively?
Proactive collection management emerges as a strategic approach that doesn’t just address these challenges but also streamlines the entire receivables process. Eager to guide your organization toward a proactive collections approach?
This article offers an overview of proactive collections management, outlining actionable strategies that empower businesses to take charge and enhance their collections.
Proactive collection management is a preemptive technique through which organizations can control the collection process and prevent late payments. This includes utilizing proactive collection strategies and leveraging technologies that results in a dynamic shift for organizations from being reactive to proactive in their collection processes.
Proactive collection management considers customer behavior and enables organizations to predict payment dates and possible delays. In short proactive collection management reduces ambiguity and expedites the liquidation of receivables resulting in healthier cash flows.
AR collections management is a pivotal component for businesses of all sizes. Beyond the pursuit of overdue payments, proactive collection measures involve a dedicated approach to oversee the entire collection operations, aiming to minimize delays and enhance cash flow.
Traditionally, the collections process has been largely reactive, centered around due dates as the trigger for dunning activities with the collection process typically kicking in when an invoice becomes due or moves into a more aged category. With many aspects of collections operations, such as prioritizing accounts, determining communication and customer engagement strategies relying on static parameters like aging buckets and invoice values, the collection teams face challenges such as cluttered collections worklist, inefficient identification of delinquent accounts, and wasted efforts.
The lack of a scalable collections process, one that considers dynamic parameters, confines the collection team to pursuing only overdue accounts. This results in decrease in overall team productivity due to labor-intensive, time-consuming tasks like manual worklist creation, and non-essential correspondence with low-risk customers along with a limited visibility of real-time data.
Transitioning from a reactive to a proactive AR collections management approach is vital for optimizing collections output and improving key performance indicators (KPIs) such as DSO and the Collection Effectiveness Index (CEI). Building the foundation of a modern collections process involves predicting payment dates and delays, incorporating dynamic changes in customer behavior into dunning rules and strategies. This shift towards a more dynamic and personalized approach can significantly enhance the efficiency of collections processes and positively impact the bottom line.
The essential aspects to consider for a proactive collection management strategy are.
Achieving accurate month-end predictions in collection operations is crucial, and while manual methods relying on historical data and seasonal patterns may be unreliable, employing predictive analytics and machine learning enhances accuracy by foreseeing outcomes and recommending proactive remedial actions based on real-time tracking.
Organizations should implement a well-defined workflow that addresses and can recognize any early escalation triggers based on proactive analysis of customer risk profile. Using an analytics driven approach can help in reducing the risks of accounts progressing into defaults.
Organizations can harness AI-driven solutions like self-service portals andautomated emails to free up collection teams for vital tasks like engaging high-risk customers, resolving disputes, and notifying customers about credit score implications from delayed payments. Employing a multi-faceted communication approach involving self-service bots, emails, and collectors enhances collection yields. Additionally, utilizing data-driven collection solutions further enhances overall effectiveness.
Using technology, collection teams can record all conversations and important details with respect to payment. The provision of these data in a centralized repository allows ease of access to all stakeholders. Any member from the collection team can then carry ahead conversations with the customers seamlessly. This helps in improving the customer experience as well.
Adopting a proactive collections management strategy will not only create a positive experience for customers but for the collection team as well. Having a proactive mindset can change the way the team collects cash from customers, which in turn changes the way customers view and interact with business. This improves payment behavior in the long run as it strengthens customer relationships and deepens trust.
Collection is never an easy process. Some of the challenges faced by organizations when they rely heavily on traditional collection practices are.
Rise in DSO and poor cash flows: When the collection teams are unable to identify and reach out to the critical high risk customers early on, it results in inability to liquidate receivables, which impacts DSO and cash flow.
Stacking up of delinquent accounts: Reaching out to low-risk customers and being unable to identify critical customers results in the collection team spending time and effort with the wrong customer set. The lack of a prioritized worklist increases the risk of delinquency.
Increased risk of bad debt write-offs: Lack of a proactive accounts receivables (ar) collection strategy and a skewed view of associated customer risks results in the collection team focusing on low-risk customers which increases the risk of accounts converting to defaults and increase in bad debts.
Lack of proper records management: Using traditional collection approaches, the teams are unable to document data including key information such as promise to pay in a centralized location where all stakeholders can access the data.
Poor management of collection calls: With no insights and information regarding previous conversation with the customer, collection calls can be ineffective and impact customer experience as well.
Prior to working towards adopting a proactive collections management strategy, it is essential that CFOs are aware of what are the major aspects to consider and leverage for maximum success. Here are 10 key questions that can help you to understand proactive account management better.
Proactive debt collection focuses on leveraging technology to predict invoice payment dates, identify at-risk customers, and generate prioritized worklists. This helps transform AR collections management into a data-driven process. Let’s look at some key proactive collection measures that improve the overall collection management process.
Anchoring proactive collection strategies in your collections system will not only help in getting your customers to promise to pay but will also improve the overall process efficiency and help optimize working capital.
Since cash is oxygen for any business, the sooner the company can liquidate receivables, the stronger its cash flow and DSO are likely to be. As a proactive collection measure, prior to calling customers the collections teams should:
Slow or inefficient invoicing processes can also lead to increased DSO. Therefore, it is even more important to ensure that invoices are error-free, are delivered to customers on time and contain all necessary information to reduce disputes. E-Invoicing and ready-to-use templates for DSO calculation can provide businesses with insights about the best possible DSO metrics based on industry-level benchmarking.
Inadequate means to identify critical accounts leads to disorganized client communications and unnecessary focus on low-risk customers. As a result, collection teams spend their valuable time reaching out to customers who usually pay on time. The best possible way to target critical or at-risk accounts is by categorizing or segmenting them based on:
Organizations require a prioritized segmented customer worklist which allows collectors to get clarity and visibility about who they need to contact first and the communication method that they should utilize. They can also get insights into when and with whom they need to adopt stricter collection strategies. Leveraging proactive collection strategies for accounts with a high risk of delinquency can reduce DSO and lower the risk of write-offs.
Dunning or sending periodic reminders can ensure that accounts don’t become delinquent. Setting up a well-defined collection system and sending out automated dunning letters via emails provide organizations more control over the collections process. Irrespective of the aging buckets, organizations should reach out to all their customers to communicate regarding upcoming payments or informing them of delayed payments. This necessitates organizations to automate and adopt omni-channel communication where the collection team personally connects with critical customers, while low-risk customers also receive timely reminders via automated emails.
Tracking KPIs such as CEI and ADD provide organizations with a comprehensive view of their AR performance and a better understanding of where and how the team’s performance can be improved. With proactive debt collection principles, tracking these metrics frequently and over shorter periods will provide up-to-date insights to maximize collections performance.
Regularly analyzing the team’s deliverables, input costs, and collections output is crucial for effectively overseeing the proactive collections management process. This practice allows for the identification of successful proactive collection strategies that yield positive outcomes and highlights underperforming tactics that should be eliminated. Additionally, ongoing performance monitoring of proactive collection measures offers valuable insights to improve long-term strategies and ensure scalability in the collections process.
Reporting and analytics help summarize the key metrics associated with the client accounts. Automated reporting helps save time and effort while excel-based reporting systems are often highly mundane, manual, and challenging. With proactive collection strategies and intelligent AR automation solutions, organizations get actionable insights by analyzing data across all critical working capital metrics through interactive dashboards. This will also help the collections team to make more data-driven decisions.
The collection team must systematically document and log all information exchanged during correspondence with customers. This encompasses recording call notes, documenting payment commitments, capturing customer queries, and appending any upcoming follow-up tasks to the worklist. This practice serves a dual purpose: it enables collectors to stay organized and informed about their accounts by consolidating communication details in one accessible location. Moreover, it facilitates a smooth transition of accounts within the collections team, particularly in situations requiring escalation and dispute resolution.
An accelerated and efficient dispute resolution mechanism is possible only when both the collections team and the deductions team work collaboratively. With proactive dispute management, one can effectively view, manage, and strategize disputes related to missing or late payments, credit limits, or incorrect and disputed invoices. This also makes client communications and collections processes more transparent, allowing organizations to better interpret their cash flow and finances.
Recommended Reading: Learn how Shurtape achieved 50% Reduction in Past-dues by mitigating credit risk with HighRadius O2C automation.
An important aspect of proactive collection measures is to reach out to customers on the very first day a payment is late so that they’re aware of the overdue balance and can take the necessary steps to pay. This can be achieved with data-driven automated communication where customers get payment reminder emails. These emails can provide payment links which customers can utilize to make payments using their preferred payment method. This is where e-Invoicing and digital payment systems further help centralize and resolve billing and payment issues. For example, you can configure your invoicing software to follow up with customers on the first day the payment is due.
At the same time, setting up a self-service portal will empower customers to access and manage their invoices and account statements, raise disputes, and make payments. Giving your customers an easy platform for discussing issues leads to faster conflict resolution and improved customer satisfaction rates.
As a proactive account management approach, before making collection call, teams must take some time to:
These best practices will help organizations understand the customer’s history with the company. Whatever the case, knowing the customer before calling will help plan the best approach to expedite collection.
Data serves as the foundational element for AR collections management, impacting worklist prioritization and customer correspondence. This encompasses information derived from the ERP, data acquired from various teams like cash application, credit management, deductions management, billing, and A/P, as well as details obtained directly from customers, such as payment commitments and invoice discrepancies. Real-time and accurate data stands as the fundamental building block in collections operations.
A high volume of invoices and an increase in the client base make it difficult for collectors to keep track of payments, customer history, and backup documentation. Besides, the lack of access to real-time data makes it troublesome for teams to process receivables effectively and on time. A centralized repository can act as a cross-functional service for AR teams that need information. This eliminates the issue of communication barriers between the teams and enriches workflow efficiency.
Organizations need to leverage order to cash (O2C) solutions such as collections automation that offer seamless real-time data integration for accounts receivable (A/R) teams. This ensures the prompt availability of accurate data, conveniently accessible at their fingertips. This makes collaboration easier as well and improves process transparency.
At HighRadius, our solutions are crafted to streamline your collections process, ultimately saving your team valuable time. Using our O2C software, you can automate account prioritization and tailor communications for low-risk customers, enabling your team to concentrate on at-risk accounts through In-App Dialer calling directly within the system.
Moreover, we enable you to offer customers various flexible payment choices, such as wire transfer, ACH, direct debit, or credit/debit cards. This versatility ensures convenient settlement options through online, instant, or scheduled payments.
We offer centralized dashboards and insights that allow you to log all crucial information and maintain team alignment. Our solution empowers proactive real-time monitoring of aging buckets and DSO projections, enabling swift identification of areas that might need attention. Regularly assessing your collections process not only eliminates inefficiencies but also uncovers opportunities for process adjustments, benefiting both your organization and your clients.
Proactive collections management involves actively identifying and addressing potential issues in a collection before they become problematic, ensuring efficient and organized maintenance of the collection. It focuses on preemptive measures to enhance collection and accessibility.
Challenges in proactive collections management include predicting future needs accurately, allocating resources efficiently, and staying abreast of evolving technologies and standards to ensure the ongoing enhancement of collection efforts. Additionally, balancing the proactive approach with limited resources and addressing unforeseen challenges poses ongoing difficulties in this context.
Best practices in proactive collections management include implementing regular assessments of collection needs, prioritizing customers based on data-driven significance and vulnerability, embracing emerging technologies for digitization and accessibility, fostering collaboration with relevant stakeholders, and staying informed about industry standards and trends to adapt strategies accordingly. Regular training for AR staff and the development of flexible, forward-thinking credit policies also contribute to successful proactive collection management.
Proactive account management involves actively anticipating and addressing customer needs and issues before they arise, fostering long-term relationships and ensuring customer satisfaction. In the sphere of collections, it entails anticipating and addressing potential payment challenges before they occur, fostering positive debtor relationships, and ensuring timely resolution of outstanding balances for sustained financial stability.
Proactive debt collection involves actively identifying and addressing potential payment issues before they escalate, ensuring timely recovery and minimizing financial risks.
Proactive collections measures involve preemptive strategies and actions taken to identify and address potential payment issues before they become overdue, ensuring effective debt recovery.
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