Companies can achieve significantly lower past-dues if they shore up their credit and collection practices.
When it comes to credit and collections best-in-class companies achieve significantly lower past-due accounts receivables. That’s because they have built sound credit and collection practices, leveraged technology to streamline the process and, when necessary, engaged in a little customer hand-holding. The result of this effort is freed-up cash and improved working capital.
While credit and collections most often resides outside the treasury department, treasurers should have some influence, even if indirectly, on receivables management. This includes the collection process, which should closely follow outstanding accounts receivables to ensure overdue accounts are properly managed.
Crimping available cash. As most know, overdue credit accounts and nonpayment of accounts receivables have an adverse impact on a company’s available cash and must be managed. Defaulting customers cost the businesses money and use up resources in the collection effort. And importantly, poor performing receivables may limit your future financing options, such as securitization, as they can negatively impact your company’s credit agency rating. So it is prudent for treasurers to get involved with strategic credit and collection decisions, like any outsourcing solutions for the order-to-pay cycle, and continually track receivables performance. They may also get involved with structuring credit and collection policies
The collection process in the order-to-pay cycle starts initially with the credit application, which should be prepared for every customer. Credit and collections go hand in hand – upfront due diligence on the credit process will reduce resources needed when it comes time to collect.
Once a credit account falls into default of the contractual terms and becomes a collection account it is assigned additional collection efforts by the company itself or is passed on to a professional collection agency. If an outsourced solution works for an organization, it will depend on internal resources, such as systems and expertise, as compared to the costs and efficiencies of outsourcing.
Many of the larger collection agencies have expanded services for the entire order-to-pay process, global recovery services and added peripherals such as cash application and legal and bankruptcy services.
While commercial collection agencies can add industry expertise and the latest automated methods to the accounts receivable recovery process, due to the sensitive nature of customer relations – including new contracts, project bids and on-going negotiations – businesses are not always comfortable handing off the collection activity to a third party. Also, poor communications between the business and the collection agency on a particular customer’s account can lead to errors and a disgruntled customer.
Keeping customers in mind. So to accommodate this need to customize their service, collection agencies work with the business to structure a collection strategy that keeps the customer in mind. For instance, “don’t call lists” are prepared for highly sensitive or key customers that the businesses want to hand hold and deal with the issue of unpaid invoices themselves. Arranging a slower payment schedule is another approach and is better than no payments at all. Often, trusted contacts at the company are the best way to approach a defaulting customer but the business needs to balance this handholding approach with the likelihood of payoff as it does consume resources.
Achieving consistent performance is critical for collection agencies to assure continual business from clients. One US headquartered corporation has recently completed moving their collection efforts back in-house after some five years with one of the largest corporate collection agencies. The ability to show strong performance and customize service to the various underlying business entities was lacking, or perceived to be lacking, and resources were shifted to allow in-house collection efforts as the partnership was wound down. But this is certainly not always the case. Thinking of your agency relationship as a partnership, not just a provider, and staying engaged with the process helps outsourcing solutions to be successful.
Tech driven.
Technology has driven automation for collections management and systems, many of which are transparent to clients, and are helping businesses to communicate effectively, improve the timeliness and integrity of customer data and increase the chances of payment. For instance, dispute management systems have been found to have a significantly beneficial impact on improving customer satisfaction and improving collections while reducing days sales outstanding.
In the end the working capital improvements from reduced bad debt and faster receivable turnover improve cash, and as such, treasury should be included in strategic decisions on managing credit and collections. Technology enhancements and access to real-time data has improved the collection process. Ultimately, the goal is to improve working capital using best-in -class methodologies to ensure that your future customer receivables become collectible cash.