Collection Account Prioritization: 5 Key Strategies to Get Better Results

Introduction

Inefficient accounts receivables collection poses a significant challenge for organizations, resulting in delayed payments and disrupted cash flows, jeopardizing financial stability and the overall health of the business. So, what can be done to avoid these issues and collect accounts receivable efficiently?

This is where collection account prioritization comes in – it holds the promise of optimizing receivables management. Not sure how to achieve that? Implementing collection account prioritization strategies can help you regain control over your collection processes, ensuring timely payments and fostering better cash flow management.

In this article, we’ll uncover actionable strategies to enhance receivables collection, enabling businesses to proactively manage collections and secure timely payments.

How to Manage Accounts Receivables Collection?

Effectively managing accounts receivable collection is vital as overdue invoices can significantly impact any business’s financial health. Collections, integral to the order-to-cash (O2C) process, are intricate, requiring payment retrieval while nurturing customer relationships.

To empower the collection team, it’s essential to identify collection account priorities, establish standardized collection procedures, and access real-time payment information. Organizations need a robust collection strategy encompassing assessing customer creditworthiness, categorizing customers, defining rules for account priorities, and implementing a solid communication strategy.

A seamless collection process not only reduces days sales outstanding (DSO), improves accounts receivable turnover ratio (ART), and decreases bad debts but also enhances the overall customer experience.

5 Key Strategies to Enhance Receivable Collections 

Create aging buckets 

An integral strategy for ensuring an effective collection process involves the establishment of a collection account priority list. A pivotal method in implementing this prioritization system is the utilization of aging buckets. These buckets categorize outstanding payments based on their duration. While each organization tailors its aging intervals according to its O2C strategy, commonly used aging buckets include:

• 0-30 Days past the due date
• 31-60 Days past the due date
• 61-90 Days past the due date
• 90+ Days past the due date

Once the categorization by aging is completed, the collection team gains a comprehensive view of priority accounts. This allows for streamlined communications, enabling the identification of customers requiring calls versus those needing email reminders. Crucially, organizations should maintain real-time monitoring of these aging buckets. Tracking monthly delinquency trends and reviewing aging buckets based on month-on-month delinquency changes is a vital practice.

Proactive customer risk assessment 

Implementing proactive customer risk assessment stands as another crucial strategy in fortifying the collection process. While establishing aging buckets remains pivotal, strengthening this categorization demands a comprehensive customer risk assessment alignment. This involves analyzing various customer-related data points, including customer creditworthiness, historical payment conduct, and business engagement level.

Enriching the categorization process with this layered analysis empowers the collection team with crucial insights. This strategic approach enables them to tailor the collection strategy precisely, amplifying receivables’ liquidation and fostering healthier cash flows.

Utilizing analytics to interpret vital O2C customer data, particularly credit risk, augments the depth of aging buckets, resulting in nuanced categorization. This heightened efficiency equips the collection team with a clear understanding of the customer segments requiring outreach, determining optimal reminder frequencies, and identifying specific payment terms for expedited collections.

Develop a robust communication strategy

Once the collection account priority system is established, effective communication with customers becomes pivotal. Communication not only influences the success of the collection process but also serves as a crucial touchpoint affecting customer experience.

Many organizations opt for a targeted communication approach, beginning with the most critical aging buckets. The collection team initiates contact with customers in the highest bucket (90+ days payment outstanding), preferably through direct communication. This allows the team to remind customers of overdue payments and articulate the impact of delayed payments on their credit score. It is imperative to document all call notes and key information, such as promises to pay, in a centralized location accessible to the team. Activity logging plays a vital role in streamlining collection communication.

After addressing the high-risk customers, the collection team can turn attention to those in the 61-90 days aging bucket. Simultaneously, organizations should ensure timely reminder emails are sent to customers in lower-risk aging brackets. A robust collection communication strategy aims to reach customers across different age buckets promptly, facilitating expedited collection. Automated email communication proves effective in enhancing collection efficiency.

Recommended Reading: 21 Credit & Collection Email (Letter) Templates

Leveraging automation in collection process

When crafting the collection strategy, a pivotal consideration for organizations is the reduction of manual, low-value tasks. This approach allows the collection team to concentrate on critical customers and minimizes the risk of delinquency. To achieve this efficiency, organizations should implement automation, particularly in tasks like sending timely payment reminders and notices.

A robust collection software, aggregates all key data such as call intent and actions identified during communication with the customer. Via automation organizations can ensure that all key information is captured in a centralized location, facilitating a comprehensive overview for stakeholders to follow up based on available information. 

The integration of automation and analytics enables organizations to maintain an updated collection account priority worklist, reflecting real-time changes in customer payment and creditworthiness. This analytics-backed categorization not only empowers the collection team with insights on prioritizing customers but also guides them on the most effective means of contacting customers.

Appropriate usage of penalty & incentivization techniques

As mentioned earlier, collections serve as a vital customer touchpoint, requiring organizations to balance expedited payment collection with maintaining a positive customer experience. Achieving this delicate equilibrium involves training the collection team to empathize with customers and understand their challenges. Leveraging the insights provided by account analytics and prioritization, the collection team can then implement actions that encourage prompt payment. 

These actions may involve a combination of penalties and incentives, clearly communicated to customers. For instance, customers with a good payment history who have delayed payments could receive customized payment terms after the collection team identifies potential challenges.

Offering incentives such as early payment discounts and extended credit limits can motivate customers to pay promptly. Conversely, for critical customers, applying additional penalty charges for late payment and withdrawing credit limits can expedite payment.

The aim of a robust collection strategy should be to bring a behavioral shift in the customer and prompt them towards timely payment. The culmination of incentivization offers and penalties, aided with effective communication contributes to this shift prompting enhancing collection efforts. 

How HighRadius Can Help Improve Your AR Collection?

At HighRadius, we provide solutions to streamline and personalize your collections process, saving your team valuable time. Our AR software enables you to automatically prioritize accounts and set up personalized correspondences for low-risk customers, allowing focused attention on at-risk accounts via VOIP calling within the system.

Moreover, we empower you to offer your customers payment flexibility, whether through wire transfer, ACH, direct debit, or credit/debit cards—allowing convenient settlement via online, instant, or scheduled payments.

Utilize our centralized dashboards and insights to keep all teams aligned by monitoring aging buckets and DSO projections. Regularly reviewing your collections process helps eliminate inefficiencies and identifies opportunities for process adjustments, benefiting both you and your clients.

FAQ’s

1. What is the difference between accounts receivable and collections?

Accounts receivable refers to the outstanding payments owed to a business by its customers or clients for goods or services provided. It represents the amount of money that is yet to be collected. On the other hand, collections refer to the process of actively pursuing and receiving those outstanding payments.

2. What is collection account priority?

Collection account priority typically refers to the order or hierarchy in which various debts or accounts are prioritized for collection efforts by a creditor or a debt collection agency.

3. What is DSO?

DSO stands for “Days Sales Outstanding,” and it is a financial metric that measures the average number of days it takes for a company to collect payment after a sale has been made. DSO is often used to assess the effectiveness of a company’s credit and collection policies.

4. What are collections on accounts receivable?

Collections on accounts receivable refer to the process of receiving payments from customers who owe money for goods or services they have purchased on credit. When a business sells products or services on credit, it creates accounts receivable, which represent the amounts owed by customers.

5. What is the biggest problem with accounts receivable?

The biggest problem with accounts receivable is often the delay or difficulty in collecting payments from customers resulting in increased bad debt, cash flow issues, impact on working capital and credit risks. 

6. How do you collect overdue accounts receivable?

To collect overdue accounts receivable, organizations should start by establishing clear payment terms and sending timely invoices. They need to follow up with reminders, offer flexible payment plans, and consider automated systems for efficient communication. If necessary, they might need to escalate to more assertive measures such as engaging a collection agency or, as a last resort, legal action.

7. How does a business measure its accounts receivable collections?

A business can measure its accounts receivable collections through metrics such as Days Sales Outstanding (DSO) and the Collection Effectiveness Index (CEI), that provide insights into the efficiency of collecting payments and the overall health of its receivables management. Monitoring aging reports, cash flow impact, and the percentage of receivables collected further helps assess the effectiveness of the collections process.

8. What is the Collection Effectiveness Index (CEI)? 

The Collection Effectiveness Index (CEI) is a financial metric that measures the efficiency of a company’s accounts receivable collections over a specific period. It is calculated by considering the beginning and ending balances of receivables, along with the cash collections during that period, providing a percentage that reflects the effectiveness of the collections process.