Magazine article Business Credit

The Do's and Don'ts of Collections

Magazine article Business Credit

The Do's and Don'ts of Collections

Article excerpt

For many companies one of the most important, but least pleasant, aspects of the business are collections. Past due receivables can be the cause of cash flow related problems and missed financial targets, while collecting these receivables can consume significant internal resources. While there is no one solution to this issue, there are a number of basic policies that will help most companies develop an improved collections solution that both reduces days sales outstanding and maintains or even improves customer relationships. What follows is a list of five things a company should do when setting up its collections solution and five things that the company should seek to avoid. It is hoped that firms will be able to look at this schema and determine what elements work best for them-and then employ them.

Do's

Segment the Customer Base

It is often the case that a company's customer base is not a uniform block of individuals or enterprises, but rather is comprised of various subgroups. Each of these sub-groups has its own characteristics and profiles. When developing a collections strategy a company should first segment its customer base and determine which strategies will work with which customers. This will allow the firm to most effectively allocate resources as well as insure that the right approach is used with the right customers-thus helping to maintain positive customer relationships.

Use Dunning Letter Process for Small Accounts

There is a general rule of thumb in business: 80 percent of a firm's customers generate 20 percent of its revenues. For these small accounts it is often not worthwhile to follow up with each one on an individual basis. The efficient firm will utilize an automated process that generates a dunning letter when an account becomes overdue by a certain account. These letters are a low-impact /high-return approach to collections of relatively small accounts.

Automate Repetitive Processes

One of the key factors limiting the effectiveness of a collections department is the amount of administrative processes they have to handle manually in addition to the business of collecting past-due invoices. This paperwork, while necessary, does not help generate any increase in collections and thus should be allotted the minimum amount of effort necessary. One way to handle this challenge is to automate as many repetitive administrative processes as possible. This may involve automatically populating forms with data stored in a collections database, using template letters that automatically draw information for the database, and outsourcing the dunning letter process if the company has a large number of past due accounts.

Use Metrics for Customers and Collectors

The only way that a company can truly know the relatively profitability of a given customer is through the use of metrics to analyze the entire customer base. Further, metrics should also be employed to determine the effectiveness of each of the company's collectors. By developing a clear set of metrics for both customers and collectors, and then consistently employing these metrics the firm will know which customers are worth maintaining and which collectors need to be retrained or replaced.

Develop Dispute Management Processes

The firms that are most effective at collections are the firms that effectively address invoice disputes in a proactive manner-thus preempting the need to undertake a 'collections' process. …

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