A collections process should not be taken with a haphazard approach. Without a set plan, the right accounts are not always contacted, clients are forgotten about, money is not collected and those at risk of not paying go unnoticed. If your collection process doesn’t follow a specific plan, it’s probably worth creating and following a routine. This can increase the number of accounts collected on and decrease your days sales outstanding.
The best way to imagine a well-run collections routine is an upside-down pyramid; including objectives, goals, strategy and activities. You want to start by creating more broad, general goals and then narrowing down towards specific activities. All of those specific activities should support reaching the overall goals of the collections department.
Below is a breakdown of each area in the pyramid and how you can apply it to your collections routine.
START WITH OVERALL OBJECTIVES
You overall objective could be something you choose annually or monthly. You want this to be an overarching, attainable goal, such as “Reduce DSO by 5 percent” or “Collect on 80% of open lines of credit”. Your collections objective is usually something that contains a percentage or number. These objectives are usually best created by working with your supervisors and CFO to determine what your business, as a whole, can achieve in the collections department.
CREATE COLLECTION GOALS
Your collection goals directly support your overall objectives. Your goals will answer the question, “How can I achieve my objectives?”. These goals are still a high level look at how can you achieve your objective. An example of a goal you can set to reach an objective might be “implementing an automated accounts receivable solution” or “focusing on making more collection calls”. These are often changes to your current routine that will begin to steer you in the direction of your objectives.
MAP OUT COLLECTION STRATEGY
Once you have created your objectives and goals, it’s time to dig a little deeper into what steps you will take to attain these. These are a little more in-depth than your goals, giving a time frame to when you will implement new plans. Your strategies might take a look at how you will tackle different accounts, such as making more phone calls to customers 60 days past due or higher.
PLAN OUT COLLECTION ACTIVITIES
This is when you get into the nitty gritty. These are the actual actions you will take in your everyday work to achieve all the above objectives, goals and strategies. You might want to plan out exactly how many phone calls you will make a day to achieve your strategy of making more phone calls to customers 60 days past due or higher, your goal of making more collection calls and your objective of reducing DSO by 5 percent.
No collection routine is complete without assessing how it worked. There’s no point in implementing a new process if you are not going to look back and see if it actually made a difference.