CHAPTER 6: COLLECTIONS
One of the best ways to ensure that your organization is paid on time is to make sure the invoice is correct and is delivered to the right address (for B2B, it should be the accounts payable department’s address). While this seems elementary, many invoices are not paid because of errors or perceived errors (e.g., billing address, sales tax charged to an exempt organization, adding shipping/handling when the agreement indicates not to include it, etc.). Collection activities should always follow the company’s policy guidelines and adhere to all laws and professional standards; they should be undertaken for all accounts past due and applied consistently. Policies and procedures should include specifics about the tone of the communication. This is critical because many orders are placed electronically and a collections contact might be the first the customer has with a person at your company. If communicating in writing, make sure to re-read the message for tone, and beware of mistakes such as using all capitals for emphasis: It is perceived as “shouting.” Late payments and bad debts can negatively affect cash flow and diminish a firm’s liquidity. Having a clear set of policies and procedures is important in your efforts to continue feeding the cash-flow fuel that your organization needs to thrive.
6.2 Collections Prioritization
Very few companies have the resources to call every one of their delinquent customers. As a result, they must design a collection strategy that will maximize collection results (and minimize past due AR) given the limited resources they have. The elements of an effective collection strategy are to prioritize collection contact by: Portfolio aging and payment performance history. Segment customers by: (1) over 30 days past due; (2) 15 – 29 days past due; (3) 7 – 14 days past due; and (4) 1 – 6 days past due. Prioritize the segments by the severity of delinquency. Within the segments, prioritize by the value of past due AR owed. Analyze payment history. For the customers who normally pay 1 to 6 days late, the collection strategy should be designed to call them only if they are past due on day 7. Note: Changing the payment behavior of customers who pay a few days late (especially large customers) is a very difficult task. Risk rating of the customer. High-risk customers need to be contacted earlier and more frequently than low-risk customers. Customers that have had payments fail for insufficient funds or have broken promises to pay. Blending the above factors will result in a prioritization strategy that enables adequate coverage of the large dollar and higher risk delinquencies within the AR portfolio. In many cases, approximately 50 percent of customers pay within or close to due dates. The above strategy will reduce the collection workload by 50 percent in such cases, while focusing effort on chronic slow pay accounts. In addition, it is beneficial to develop different collection strategies for different segments of your accounts, such as government vs. private sector, high vs. low risk, by sales volume, domestic vs. export, etc. Be careful not to define too many segments and too many strategies—the complexity will be counterproductive.
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THE ACCOUNTS RECEIVABLE SPECIALIST CERTIFICATION PROGRAM E-TEXTBOOK
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