Is It Too Late to Achieve Your End-of-Year DSO Goals?
Ten Recommendations for Ending the Year on Strong Footing
Now that we are past the mid-point of November, the end of the year is zooming into focus. Chances are, there is a lot that needs to be done in terms of accounts receivable (AR) management between now and December 31st, especially if you are short of your Days Sales Outstanding (DSO) goals. If that’s the case, collection activities should be at the top of your to do list, because any changes in credit policy and procedures will be too little too late for this year.
The biggest problem—there probably are not enough days left to get everything done. While there may be six weeks until the new year, the holidays severely shorten the number of work days. Moreover, a lot of your customers will shut down between Christmas and New Year’s Day. Even if they don’t, a lot of their employees will be taking time off, and you may be doing so as well. That leaves you with only about 20 work days—four weeks instead of six—in which you can reach your counterparts and hope to have them expedite payments. That’s the bad news. The good news is that given 20 days, you can still have an impact and improve your DSO and other AR metrics, but there is no time to waste.
A related problem is the payment processing calendar of your customers. You can’t expect them to process payments the last ten days of December. While some customers will continue their normal payment processes around the holidays, many others will choose to sit on as much cash as possible as year-end approaches. This increases the imperative that you reach any critical customers sooner rather than later if you need to accelerate cash flow.
Dealing with the End-of-Year Time Management Challenge
Clearly, the end-of-the-year scenario is a time management challenge that will require both planning and disciplined execution. Anything less, and you are wasting valuable time.
First and foremost, you will need to prioritize your time. For those twenty days when you can count on your customers being at work, you need to concentrate on making collection calls. If you cannot reach your counterpart you should then leave a message and follow-up with an email, but the emphasis should be on making as many calls as possible. We’ll discuss this in more detail in the next section.
Outside of those twenty crucial days, there are other things that you can be doing to make the best use of your limited time. While these activities will be less impactful than collection calls, they can still contribute to your objectives. Making collection calls on the slow days around the holidays is not a good use of your time because there is a much diminished chance of reaching your counter-parties. The best use of this time involves switching to other tasks that can bear fruit during your window of opportunity.
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Ten Recommendations for Ending the Year on Strong Footing
As the year draws to a close, the urgency to effectively manage your AR becomes paramount. With limited working days left and the added complexities of holiday schedules, businesses must adopt a targeted, strategic approach to collections. Success in this period hinges not only on addressing overdue accounts but also on ensuring current balances remain on track. The following actions are designed to help you navigate this critical time, improve cash flow, and end the year with a stronger financial position.
1. Segment Your Accounts Based on Payment History
Your first step requires a bit of portfolio analysis. This need not be extensive or in-depth. Want you need to understand is how your AR is segmented. In order for the collection calls discussed above to have maximum impact you need to identify those customers, from highest to lowest past due balance, who are not likely to pay on their own by the end of the year. This first segment also includes any accounts who are still current, but who can be expected to become past due before the end of the year. Changing the payment behavior of these customers will have the greatest impact on your cash flow. The second segment you need to list is those customers with a high AR balance that is current and who are expected to pay within terms.
2. Implement a Prioritized Communication Strategy
Now that you have these two lists, you need to figure out your collection coverage. You should have an idea of how many collection calls you can make in a day. If that number is 15 and there are 20 days available, you should be able to make 300 calls. Those should be allocated to the customers with the 300 highest past due balances owed on the “not likely to pay on their own” list. The rest of the list should be sent dunning emails or other communications, preferably on the days or at times when your making phone calls will have a limited chance of reaching the right party. Your second list should also be emailed or otherwise notified, but rather than a dunning note, you want to send them a courtesy reminder along with a copy of any invoices outstanding. With these good accounts, you just want to make sure nothing slips through the cracks in terms of a lost invoice or a billing issue that needs to be addressed. By doing the above, you are ensured of comprehensive coverage.
The following recommendations supplement the above strategy.
3. Make Judicious Use of Credit Holds
Should any of the accounts on the “not likely to pay on their own” list place a new order between now and the end of the year, you should consider holding their order if they are not willing to promise payment of the past due balances they owe. If the account can’t be trusted to keep their payment promise, then hold the order until payment is made. You should work with the sales agent with these accounts, reminding them that a credit holds is an effective lever for eliciting payment.
4. Escalate When Needed
For critical accounts, escalate collection efforts to senior decision-makers. If there is severely past-due customer who you have trying to collect without success, send a final demand letter and then turn them over to your collection agency or attorney if they don’t pay within your demand period. All customers requiring escalation should be addressed immediately, not later in December.
5. Offer Incentives for Early Payments
Consider offering short-term incentives for early payment, such as small discounts or waiving late fees. Use these incentives strategically, focusing on accounts where the impact on cash flow will be most beneficial.
6. Offer Flexible Payment Options
Accept a broad range of payment methods (e.g., ACH, wire transfers, credit cards) to make it easier for customers to pay quickly. If a large amount is being paid, offer to cover any wire transfer fees.
7. Request a Large Lump Sum up Front with Payment Plans
Some past due customers will not be able to pay everything they owe you before the end of the year. When appropriate, offer installment options or partial payments to secure at least part of the payment before year-end. In those cases, push for as large an initial payment as possible.
8. Leverage Technology
As much as possible, use automated email reminders and messages to maintain consistent follow-ups without overwhelming your team. If you have collection automation software, you end of the year communication strategy should be embedded into your collection workflow
9. Focus on Maintaining Relationships
Remember that collections are not just about securing payments but also preserving customer relationships. Be professional, empathetic, and solution-focused in your communication. Your customers are dealing with the year end rush as well, so finding common ground is the best place to start your discussions and build momentum for next year.
10. Monitor Your AR Metrics
Keep a close eye on key AR metrics, especially DSO, past due aging balances, and cash collection forecasts. Use this data to fine tune your strategies, focusing your efforts where they will have the greatest impact.
Final Thoughts on Year-End
By tackling these tasks with urgency and precision, you can optimize your AR efforts, improve cash flow, and finish the year on a strong financial footing. With proper planning and disciplined execution, the year-end crunch can be turned into an opportunity to set your business up for success in the new year.
While you may be focusing on year-end collections, the slow days around the holidays provide you with the opportunity to begin planning next year’s credit and collections strategy. Analyze what worked well this year and where improvements can be made. Also, use the holiday downtime to update credit policies, improve AR processes, or implement new technology solutions to drive greater efficiency.
You should also use slow days to clean up the clutter in your AR and pave the road for better performance in the new year. The problem with AR clutter is that it distracts from what is really owed, making collections more difficult and less efficient. Matching-off credits and debits, including un-applied cash receipts and partial invoice balances as well as writing-off small balances that are not worth the time required to research them, will leave your customers with clean statements and provide everybody with a clean slate come January.