What Is Accounts Receivable Collection?
Despite your company’s best efforts to screen customers and extend credit only to those you think will be the most reliable, things happen. Not all of them will pay their bills on time, and then it becomes necessary to collect on payments that are due or past due.
Good management of the debts owed to your company is important for a number of reasons. If your business is not effectively managing its collections, you may run the risk of not having enough cash on hand to sustain operations. Relations with your customers and investors can also suffer when bills are not collected on time.
The process of collections involves many steps—most of which entail reaching out to and working with customers to allow them to pay their bills in a reasonable amount of time. The process may seem basic, but it can pose an array of challenges for your business.
What Are the Biggest Challenges of the Collection Process?
Your business may run into several obstacles while trying to collect unpaid bills from customers. Many of these reflect our increasing reliance on data.
While data is plentiful in the digital world, it is not always accurate, reliable, accessible, or relevant. Your business may face the difficult task of maintaining up-to-date contact information for the customers you must reach.
A customer may no longer be at the address you have, or a business may no longer exist. You can have trouble identifying the correct person or having the information you need to connect with them. Lastly, working through any or all of these issues can take up valuable time, and in some cases, lead to uncollected debt.
Data challenges can also delay the communications process in collections, which leads to other complications. To maintain good customer relations and agree on a reasonable payment plan, your business needs to build trust with the customers who are behind on their payments.
You need to reach them quickly and be able to share information with them in a timely manner to avoid further delays. Poor communication created by bad customer data undermines this process.
Once you get past the challenge of inaccurate data, there will be other obstacles. For example, laws governing collections vary from state to state, and you need to comply with privacy and data security issues. With the rapid expansion of remote work, the need for sensitivity to these issues has grown.
It’s critical to stay on top of the myriad of state laws, as well as federal requirements, like the Telephone Consumer Protection Act (TCPA) and more recent requirements from the Consumer Finance Protection Bureau (CFPB), to avoid creating further complications for your collections.
When you do connect with the customer, they may very well have their own issues, which will create even more “speed bumps” in your collections process. Customers will present any number of excuses, such as a job change, divorce, medical emergency, and in the case of another business, its own collection and cash flow problems.
Customers may also demand that you provide full documentation to verify that they indeed owe the debt, requiring you to do more research into your own records and provide the necessary verification. All of which will further impede your collections process.
How to Improve the Accounts Receivable Collection Process
Despite all these challenges, your business can take steps to improve its collections. These steps will help you collect and manage your customer data, and they will smooth over what can otherwise be a tense and difficult process of working with customers who are behind on their payments.
1. Create an Aging Report
For effective collections, your business will want to create a report that tracks and measures the payment status of all your customers. This aging report will direct and inform your collections efforts.
It will include information about the amount of debt owed and should be segregated into groups according to the number of days since invoice. It might be broken down into categories like 0-30, 31-60, 61-90, and so on, to reflect the type of action that needs to be taken with each customer, depending on how late they are.
2. Proactivity Is Key
Have a system in place that allows your business to act on delinquent payments right away. Delayed correspondence not only hurts your business, but it hurts the customer, too. Reach out to customers as soon as possible to let them know they are in arrears and help them get on track with their payments.
Communicating with customers about due dates and penalties before they become delinquent, i.e. when they first become customers, helps to make sure that everyone understands what is expected of them.
3. Avoid Delay
Move quickly and do not lose time sending notices when accounts are past due. The greater the delay, the greater the likelihood that the debt will not be collected. Send notices right away, within a day of when a debt becomes past due.
4. Be Flexible
Show your customers that you are reasonable and willing to let them work out a payment plan this is fair but doesn’t extend the timeframe for payment unnecessarily. Some companies also offer discounts or other incentives for customers who can pay in a shorter amount of time.
5. Good Invoices Increase Payments
Your collections will be greatly improved if you have an effective invoicing system. Your invoices should be accurate and professional in appearance with all the relevant information. Invoices should be sent early and clearly inform the customer about due dates and amount due.
6. Good Data Supports Good Collections
Evaluate your data. Implement a system for checking and verifying customer contact information. Eliminate duplicate records and check data at regular intervals, before it has a chance to undermine your collections.
7. Trust Technology
While in many ways, technology has made collections more complicated, it can also help you improve the process. Several of the best ways to improve collections involves using software and automation to address the many pain points that affect the process.
Invest in a software system that allows you to leverage the best available features.
8. Cloud-based Software Is Secure
Technology can help your business meet the privacy and security challenges of collections in a digital environment. A cloud-based platform will use encryption to give you the highest level of security for handling sensitive information and meeting state and federal privacy thresholds.
It also protects against breaches and other threats. Speech analytics can monitor your interactions with customers and automatically generate alerts when certain language or keywords are used.
9. Use Account Software to Generate Dunning Letters
Late notices or “dunning letters” are sent to customers notifying them that they are late on their payments. You can use software to generate dunning letters at set time intervals, eliminating the manual labor of producing these letters.
10. Communicate In Real Time
It goes without saying that those collection calls can be a tense interaction with customers. Technology can help smooth over those bumps by improving communications and eliminating delays.
Some platforms allow your agents to send terms and conditions or documents for signing via text during a call, to avoid delays and get the most of their interaction with the customers.
Collections is a difficult and sensitive process, but an essential one for your business. Interactions with your customers who are behind on their payments can put both parties in a difficult and awkward position—and one that strains the relationship.
There are many steps you can take to minimize the pain of this necessary process and ensure maximum collection of debts without alienating customers. AR collection management software and technology aides this process in many beneficial ways.
Read this white paper from Ventana Research to discover how accounts receivable automation can help your organization achieve better performance, handle working capital more efficiently, and minimize credit losses from customers.