Are Your Collection Efforts Myopic?
Customer Visibility and Transactional Transparency Improve Cash Flow and Mitigate Risk
In too many organizations, credit and collection decisions are compromised by the fog of war. Gathering all the details needed to inform a decision becomes a time-eating burden. For example: to make an effective collection call, you need to know who to contact, the AR status and AR details of the account, if there are any disputes, and what prior efforts have been made to collect the balance due.
Business decisions require actionable data, especially when credit and collections are involved. A high degree of transactional transparency across the entire Order to Cash Process (O2C), coupled with 360-degree visibility of customers and their life-cycles, is necessary to optimize accounts receivable (AR) performance.
What if that information isn’t in one place? Too often, customer and AR information is kept in an assortment of data silos. Without easy visibility of all those intelligence sources, it takes longer to thoroughly prepare for collection calls or create the dunning notice. Skip the preparation, and the call and the dunning notice are less effective. Likewise, credit approvals also get delayed due to the time it takes to research all the details.
Greater Visibility Yields Tangible Benefits
A manufacturer of metal fasteners and welding equipment ($25 million annual revenue) realized a 30 percent month-over-month increase in collection volumes after improving information access for the credit staff. Here’s what they did:
Consolidated customer AR details with Customer Master File details in a single Account Status screen
Created an account-level Contact Log for the credit department
Provided One-Click Navigation between the Account Status screen, the Contact Log screen, and the Order Queue
Though access to customer credit profiles was not possible (they remained paper-based), these changes provided the credit staff with easy access to all the information needed for routine credit and collection activities. As crucial as the consolidation of information on just three screens was the easy navigation between these screens. The resulting increase in collection volumes stemmed from two factors:
Less time was spent releasing orders, expanding the time available for collection efforts
The average number of collection calls and correspondence generated each day increased
For this four-person credit department, the 30 percent increase in collection volume was greater than the gains that could have been expected by hiring another collector, which would have substantially increased overhead. Instead, a one-time, in-house programming initiative, which cost next to nothing to execute (a couple of days programming) incurred no ongoing costs . . . only benefits.
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The Five Pillars Underlying Effective AR Management
The accumulation, updating, storage, protection, and retrieval of Customer, Credit, Sales, and AR data is central to your revenue-producing and cash-generating operations. The five primary categories of information required to effectively manage the O2C process and assure optimal AR performance are:
Customer Master File: mostly standard account details
Credit Profiles: for all customers
AR Records: including every open and closed transaction for every account
Sales History: both volumes and product lines
Customer Contact Logs: both sales/customer service and credit/collection
Customer Master File  Â
Account details contained in a Customer Master File should provide all the necessary data fields for invoicing and contacting your customers. Your business/accounting software will include a Customer Master File module or at least all the following demographic and account-specific data fields:
Demographic Fields: Besides a unique account number, your system should be able to store the legal name of the business, any doing business as (dba) name, physical addresses, the billing address, shipping addresses, Employee Identification Number (EIN) also known as tax ID, license numbers, owners/officers names, contact names (primary and secondary) along with their emails and phone numbers.
Assigned Fields: These include fields that define how you will transact business with each account, such as payment terms (or payment terms code), credit limit, risk classification, price code, sales tax status (or flag), and registration numbers
The software also must facilitate the easy retrieval and updating of this data. In addition, this customer data must be kept up-to-date. Dun & Bradstreet reports that 20 percent of their credit report files incur demographic changes every year. Expect the same rate of change for your files.
Credit Profile
The customer Credit Profile should contain all the information used to determine if this customer will be sold on credit terms or cash only. It should contain the customer’s credit application, credit bureau reports, trade and bank references, financial statements, important communications, sales tax exemption certificate, mutual contracts, and any other documentation that provides information about the customer, preferably all in easily retrievable electronic formats rather than paper files. The credit application and references should be updated periodically, and financial statements and credit bureau data should be updated even more frequently.
AR Records
It is critically important that you have quick access at all times to an accurate, up-to-date AR Ledger. The AR Ledger, broken down for every individual customer, contains every open transaction resulting from sales you made, payments received, credit and debit memos issued, etc. The AR total informs you how much cash you can expect to receive (assuming all of it will be paid) and approximately when (based on its aging). This may be your most valuable record and will inform you of:
The customers that are past due and need to be contacted to pay their invoices The AR Ledger is the source document for collection activity.
The credit exposure you have with every customer. If you have a significant financial exposure to financially weak customers, your risk of never collecting and incurring bad debt losses is elevated, and therefore, efforts should be made to reduce the amount of at-risk receivables owed.
Individual customer ordering and payment trends are informative for your periodic re-evaluations of each customer’s creditworthiness.
Sales History
Having a minimum five-year sales history for every one of your customers serves several important purposes. Besides guiding your Sales and Marketing efforts by identifying fast-growing customers, those who have reduced their purchases from you, and other sales trends, Sales History is important to your Credit Control and Collection efforts in gauging customers’ lifecycle status.
There is a tendency to treat low-sales-volume customers more strictly because you are more likely to institute a shipping hold, issue payment ultimatums, etc. That’s fine if they are an unimportant customer, but what if they are growing?
The opposite is true of high-volume sales customers. They are treated with more deference than small customers. Every customer-facing employee should know who the top 25 customers are (ranked by sales volume), but what if they are falling in rank?
It is essential for sales and credit efforts to be aligned. Being able to evaluate a customer’s sales history, along with their credit and customer lifecycle status, is key to optimizing the risk/reward equation.
Customer Contact Logs
Most business/accounting software has the capability for entering notes at the account level. These can be used for both customer service and collection contacts. Many companies have separate Customer Relationship Management (CRM) or Sales Force Automation (SFA) software. Then, the accounting software should be used exclusively for collection and other credit-related notes. Bolt-on credit and collection software solutions typically provide for both account-level and invoice-level notes. Contact logs residing in multiple systems create an impediment to better and faster decisions.
Ideally, both sales and customer service logs and credit and collection logs will be readily accessible for making credit or collection decisions. The use of Artificial Intelligence (AI) tools provides a way to readily consolidate the intel in multiple data sources for better decision support.
It’s All About Saving Time & Making Informed Decisions
Quick, convenient access to accurate information is an absolute requirement for timely, astute business decisions dealing with accounts receivable. Fortunately, there are many business software solutions that provide a 360-degree view of the customer. Many are well-suited to small businesses in terms of affordability and ease of installation and maintenance.
ERP and accounting systems have been adding AR functionality in recent years, though many remain inadequate from a credit and collection perspective. There are, however, several small business credit and collection software solutions that integrate with popular core financial systems. These can provide a high level of customer transparency as well as workflow tools at an affordable cost and very attractive ROI.
Furthermore, PC desktop tools have become increasingly adept at providing ad hoc solutions that credit analysts and collection specialists can employ to increase productivity. The advent of AI is making these tools even more powerful and more readily applicable to an AR environment. It just requires a little bit of learning and innovation to find ways to save time, make better decisions, and thereby achieve demonstrable results.