Improving AR Collections Management: Maximizing Cash Flow in a Changing Economy

Introduction 

In today’s rapidly changing business landscape, maintaining healthy cash flow is critical for the success of any business. However, with the economic impact of the pandemic, collecting payments from customers on time has become increasingly challenging. To overcome this challenge, businesses need to adopt a data-driven approach to AR collections management, and customer segmentation and prioritization are essential steps in this process.

By dividing customers into different categories based on factors such as payment history, credit score, and invoice amount, businesses can prioritize collections efforts and allocate their resources more effectively. This can help improve cash flow, reduce bad debt, and optimize the AR collections process. In the following sections, we’ll explore the benefits of customer segmentation and prioritization and how businesses can overcome common collection challenges to achieve their AR goals and objectives.

Understanding Customer Segmentation and Prioritization

Customer segmentation and prioritization are essential steps in optimizing the AR collections management process and maximizing cash flow. By dividing customers into different categories based on factors such as payment history, credit score, and invoice amount, businesses can prioritize their collections efforts and allocate their resources more effectively.

Customer Segmentation:

• Aging Buckets: Categorize customers based on the time periods for which payments are due to identify overdue accounts and collect them early to avoid bad debts.
• Value to the Company: Segment customers based on the invoice amount to identify high-paying customers and avoid missing out on hard dollar payments.
• Payment Performance: Divide customers into high-risk and low-risk categories based on their past payment performance to identify on-time payers and consistent late payers.
• Credit Risk Category: Classify customers into high-risk, medium-risk, and low-risk categories based on their credit data and associated risk class to identify payable customers, likely-to-pay customers, and deny-to-pay customers.

Prioritizing the Collections Task:

• Analyze aging reports, credit scores, risk categories, and dollar value to recognize priority accounts and focus collections efforts.
• Use technology and automation to create priority worklists and send and track collections correspondence at scale, increasing the effectiveness of collections and reducing operational and functional costs.

However, during uncertain economic swings, businesses face friction related to collections recovery. Customers may be more hesitant to pay, and businesses may struggle to maintain positive customer relationships while still collecting payments on time. To overcome this friction, businesses can adopt a customer-centric approach to collections, focusing on building relationships and communication. They can also leverage technology to provide self-service options for customers to make payments more easily, reducing the friction in the collections process. Next, we’ll explore some of the collection challenges businesses face during uncertain economic swings and how to overcome them.

Understanding the Challenges of Collecting Payments in a Changing Business Landscape

Cash collection management is an essential part of maintaining cash flow for any business. While getting paid on time is the ideal scenario, the reality is often different. To streamline your collections process, you need to act quickly and stay determined. Acting quickly can help you collect the money owed on time, and staying determined can ensure that you get paid in full.

To optimize your collections process, it is crucial to identify the challenges you may face. Some of the most common challenges include:

1. Change in customer behavior

In the present scenario, most customers want flexible deadlines due to cash flow limitations. So it is essential to identify customers and segment them accordingly. Proper segmentation will help reduce receivables risk. You can classify your customers for risk based on credit scores, credit limits, customer financial history, and aging buckets.

2. Difficult to access data

Often, it is difficult to find updated and accurate contact information of a debtor. This happens primarily due to the following reasons-

• Perhaps the contact information used for the original credit is out of date, i.e real-time data is absent.
• Maybe there’s an incorrect entry for the debtor in one or more of the available databases.

Trying to locate and access up-to-date customer data without a central repository can eat up a collector’s daily time and effort.

3. Aggressive collection strategies

Collections processes need the right balance of persistence tempered by a gentle tone of voice. If you come across as headstrong, it can cost you a customer. Sometimes, customers may have missed a payment due to something as mundane as forgetfulness.

In other cases, it could be that they are facing temporary fund problems. It is always advisable to assess the situation and follow up with the client, keeping in mind that you have to maintain a positive customer experience for a long-term business.

4. Unavailability of the customer’s team

In some cases, the delay in payment could be due to the unavailability of the customer’s team. This mostly happens in SMBs(Smaller Medium Businesses) where the workforce is small with limited resources. Here, collection includes mostly dunning communication through regular calling and sending emails which are both time-consuming and ineffective.

Now that we have identified the barriers to debt collection, we need to find ways to address these challenges and improve collections recovery.

How to Improve Your Collections Process: 5 Strategies to Overcome Collection Challenges

Effective strategies for overcoming common collection challenges are key to ensuring a smooth collections process and maximizing cash flow. Here are five strategies that businesses can adopt to overcome common collection challenges:

1. Establish clear credit policies

Changing consumer behavior requires a change in collection strategies. Start by ensuring that you have a clear credit policy in place, which includes comprehensive clauses to establish the credit terms. Segmentation of the customers, based on their payment behavior, can help you design an effective collection strategy.

2. Automate data collection

To avoid difficulties in gathering data, you can ask your clients to fill out credit applications. A ready-to-use credit application template helps automate the data collection process. You can also contact credit agencies and inquire about a customer’s past credit and payment history to learn more.

3. Adopt proactive approaches

Adopting proactive approaches in invoicing and collections recovery can help you get the payment before the due date. Having a deadline in place and following up with the customer can minimize the risk of bad debt. Also, set up a process and act on it to avoid late payments.

4. Maintain positive customer relationships

Aggressive collection strategies can affect your long-term customer relationships. The tone of your voice can impact the success of your conversation. Always listen carefully to what the customer tells you and try to keep the dialogue constructive. Stay calm even if the debtor becomes a bit difficult to handle. This will ensure that your communication is successful without hampering your relationship with clients.

5. Leverage technology

Utilize the latest technological advancements like cloud-based accounting software, automated payment reminders, and payment portals to streamline the collections process and increase efficiencies.

By adopting these strategies, businesses can overcome common collection challenges and improve their collections recovery. As we move towards the “next normal,” it is important to continue to adapt and evolve collections strategies to meet the changing needs of customers and businesses. In the next section, we’ll explore a blueprint for the future of collections in the “next normal.”

Collections Optimization in the Next Normal: Blueprint for the Future

As we move towards the “next normal,” collections strategies need to evolve to meet the changing needs of
customers and businesses. Here are some ways to improve accounts receivable collections and minimize collection
risk:

1. Use analytics to assess accounts receivable portfolio

With the help of analytics, businesses can categorize their accounts receivable portfolio into different
segments based on the risk profile of the customers. This helps in tailoring collections strategies to the
accounts that need them most. For example, high-risk customers may require a more aggressive collections
approach, while low-risk customers may not require frequent follow-ups.

2. Renegotiate payment terms with customers

In the next normal, it’s important to be flexible and work with customers to find mutually beneficial payment
solutions. Businesses can incentivize early payments, provide short-term relief for customers in temporary
financial distress, or work out payment plans with high-risk customers to avoid bad debts.

3. Monitor accounts receivable with key metrics

Measuring metrics like accounts receivable turnover ratio, days sales outstanding, and accounts receivable aging
can help businesses spot potential cash flow problems early. This allows them to enhance cash flow, lower
utilization of lines of credit, improve customer satisfaction, and reduce write-offs and bad debts.

How HighRadius Can Help You Achieve Your AR Collections Goals and Objectives

HighRadius’AI-based Collections Software can help businesses in AR collections management by automating the collections process and improving collections recovery. Here are some key product features that can help businesses streamline theirreceivables and collections management:

• AI-based Prioritized Worklist: The software automatically prioritizes customers with payment predictions, promise to pay & aging analysis, customer segmentation, and recommendations to customize collections strategies. This helps businesses focus their collections efforts on high-risk customers who need more attention.

• AI-Powered Touchless Dunning: The software enables automated correspondence via email, fax, print, and mail for low-risk customers along with ready-to-use dunning templates. Businesses can add, edit, or update templates based on their specific requirements. This helps in maintaining a positive customer experience while still being effective in collections recovery.

• Smart In-built VoIP Calling & Payment Behaviour Prediction: The software has in-built VoIP calling enabling collectors to call customers from the software and storing all customer interaction history at one place. Additionally, it predicts whether a customer will break or honor the payment commitment, enabling businesses to take proactive action.

• Automated Invoice Status Tracking: The software can automatically push invoices to AP portals and extract the status of every open invoice on a regular basis. It can also auto-extract promise to pays from AP portals in real-time, enabling faster collections recovery.

• Faster Dispute Resolution: The software enables collectors to create invoice-level disputes and initiate automated workflows for faster dispute resolution. This helps in validating the dispute within collections, so that simple disputes are closed without a long resolution process.

HighRadius’ AI-based Collections Software can help businesses achieve faster recovery to reduce DSO, streamline their collections process, and improve their cash flow. By automating the collections process, businesses can focus on building stronger customer relationships while still achieving their AR goals and objectives. As we move towards the “next normal,” leveraging technology like HighRadius can help businesses adapt and thrive in a rapidly changing business landscape.

FAQs on How to Improve A/R:

1. What is the first step a company can take to improve collections of accounts receivable?

The first step a company can take to improve collections of accounts receivable is to adopt a data-driven approach and segment customers based on payment history, credit score, and invoice amount. This allows businesses to prioritize collections efforts and allocate resources more effectively, improving cash flow and reducing bad debt.

2. What are the ideal steps in a collections process?

The ideal steps in a collections process include segmenting customers based on payment history, credit score, and invoice amount, prioritizing collections efforts, utilizing technology and automation, maintaining positive customer relationships, and monitoring accounts receivable with key metrics.