As with many areas of a business, the accounts receivable department needs structure and processes in order to continue to grow and do their job efficiently. One way to improve processes and standardize them across the accounts receivable department is by creating a collection strategy. Implementing a collection strategy can exponentially increase the amount you collect on each month because every collections representative knows what their job is and the best way to do it. There is organization when disputes or other issue occur, instead of chaos ensuing.
In this whitepaper, we will help you to understand what a collection strategy is and build one for yourself. This includes a business credit application template and step-by-step instructions to setting up a collection strategy and acting on it.
WHAT IS A COLLECTION STRATEGY
Developing a collection strategy is one way to ensure that your accounts receivable stays under control and you continue to collect your cash. Without one, there is disorganization, disconnections, miscommunications and just simply chaos in the accounts receivable department.A collection strategy sets a standard for how accounts receivable collections will be conducted. When will you be sending out first invoices? How often will you get in contact with your customers? Are you making follow up phone calls? If there is no order, then customers will fall through the cracks. If you aren’t ensuring that a follow up phone call is made after a collection letter goes unanswered, than your average days late will only increase.
HOW TO SET UP A COLLECTIONS STRATEGY
You may understand the importance of having a collection strategy, but starting from scratch to make one is a different story. So where do you even start to make a collection strategy?
UNDERSTAND CURRENT PROCESSES
The best place to start is by identifying your current processes, if any. Figure out what kind of habits your collectors have. Maybe one likes to send invoices out on the first week of the month, while another may send invoices immediately after the product or service is delivered. Talk to each representative and find out which has seen the most success. Once you discover what collection strategies are working best, you’ll want to make that uniform across the accounts receivable department.
USE A BUSINESS CREDIT APPLICATION
When creating a collection strategy, the best place to start is creating a business credit application for customers. A business credit application helps you to decipher who is the biggest credit risk and who you can safely extend credit to without much worry. If you’re a company who works with other businesses and often extends credit, you should be using a business credit application. In it, you can gather important information, such as trade references who can vouch for whether the customer will pay you on time.To create a business credit application, you will want to start with the applicant’s name. This is typically the owner or CFO. You will want to gather the formal name of the business, their DUNS number, the business address and any other important general information about the business.
Next, you will move to more in-depth company information. You will want to know when the company started. If they have been around for a decade or longer, you can typically assume that their credit risk is lower because they have been able to successfully manage their finances for so long. If they are a start-up, you may consider their credit risk to be higher. You will want to ask what their total and current assets are, annual sales, after tax profit and what credit limit they are requesting. If their liabilities total more than their after tax profit, you may want to look further into this company and extending them credit.
The next portion of the business credit application is their bank references. The bank references can give you a good idea of how much the company has in resources. If you have permission to speak with the company’s banker, you may get some good insight into how they manage their financials.
Finally, one of the most important sections of the business credit application is the trade references. These three references are other companies who have already extended credit to the customer. They will be aware of how often they pay late or on time, how much they have extended and how long they have been a customer. These are the best insights on exactly what kind of customer the applicant will be.
A business credit application sets the stage to a good collection strategy. No matter how aggressive your collection efforts are, if your customer doesn’t have the funds to repay you or doesn’t care to, you simply won’t collect on time. However, if you use a business credit application and only extend credit to customers with good credit history, you are guaranteed to improve your collections. Download our template below for a good place to start.
When it comes to collections, one of the most time consuming tasks can be making phone calls. Often times you have to look up the customer account, recall past conversations and check notes all before making the call. Once on the call, you never know how the conversation will turn out. It’s best, when creating a collection strategy, to have a set script for your collection representatives to follow. This way, no matter what a customer throws at them, you know that they are following best practices and have the highest chance at collecting. Here are some steps that collection representatives can follow when making phone calls in your collection strategy.
Instead of jumping straight into collection mode, it is helpful to make conversation with the customer. Ask them how their day has been and make small talk. This will help to build a relationship and allow the customer to feel more comfortable speaking with you. The more comfortable they are, the more likely they will open up to you about their payment situation.
Once you have caught up with the customer, it’s time to ask about their outstanding payment. Including all information about when it was due, when you sent out the invoice, what the invoice number is, how much was due and any other information you sent them.
Once the payment is brought up, the customer will explain why they haven’t paid in order to fill the silence. Wait to see if the customer acknowledges that they have an outstanding debt that they owe on. Pay attention and see if there are any inconsistencies or contradictions that need to be addressed. This will give great insight into where the customer is at with their financials and whether they simply forgot or are aware of their late payment.
Always end the call with an agreement to pay. Ask them for a date when you can expect to see payment arrive and whether that will be coming in the mail or from your payment portal. Keep note of when they agreed to send payment in by and follow up on that date. If they are struggling to pay, make an agreement for payment installations.
It’s always a great idea to take notes during your phone calls, but one of the best ways to ensure a customer will pay on time is to record the conversation. You will have the customer’s promise to pay recorded, so they cannot argue it when the time comes. This holds extra weight of accountability for the customer. Having a set script and form for all collection representatives to follow ensures that your collection strategy will stay on track. If your collection representatives are approaching calls differently, some may see more success than others and some customers may fall out of sight. By reaching out to past due customers and recording the phone calls, you can ensure that you will collect quickly.
BE PROACTIVE IN YOUR COLLECTION STRATEGY
It is important when establishing a collection strategy to encourage your collection representatives to remain proactive. Catching a customer who will become a struggle to collect from before it happens is the best way to keep your accounts receivable on track. There are often subtle signs that you should help your collections representatives learn to recognize when a customer is headed towards nonpayment. Below are a few collection TIPS to help you remain proactive.
In order to be able to pick up on the subtle signs of future nonpayment, you have to keep in touch with the customers. If you are only contacting them via email to send them their monthly invoices, chances are you won’t know what is going on in their finances. Pick up the phone every now and again to alert them to an invoice and make conversation. The more they see you as a friend and partner, the more they will open up.
There are a few signs that a company is struggling with their finances, which will alert you to whether they will slip on your payments.
If a company is only paying smaller invoices and not larger ones, this may be a good indication that they are struggling to make payments.
Keep track of how long it typically takes a customer to pay. Set up alerts in your accounts receivable software when a customer starts to slip and pay later, this is a good indication that they are struggling.
When a customer is struggling financially, they will feel an obligation to pay those they see as a business partner rather than just another vendor. This is another good reason to keep up with regular reviews and keep yourself on your customer’s side as a partner.
The sales department shouldn’t drop out of view as soon as the sale closes. The sales department should be conducting their own regular reviews to ensure the customer is getting everything they need and are satisfied. The sales rep the customer worked with most during the sale often creates a good relationship and the customer is most likely to feel more relaxed and open to talk about company issues, turnover and other financial related topics.
Keep an ear to the ground about your customer’s company and industry updates. If you deal with a lot of companies in an industry that is struggling with demand, you will want to keep an eye on those accounts. If you have customers in a country that is currently struggling economically or is becoming unstable, you will want to reconsider that relationship. You will want to give customers a call if you hear talk of acquisitions, mergers, change of leadership or other big impacts. All of these could affect how soon you see payment.
GETTING PAID WITH YOUR COLLECTION STRATEGY
The whole point of creating a collection strategy is to get paid faster. If it were easy to collect on unpaid accounts, no one would need a specific collection strategy tailored to their industry and customers. However, collecting on unpaid accounts is a real problem for many, many businesses. Once you’ve created the collection strategy and have it typed out and posted for your collection representatives to see, the last step is simply ensuring that you get paid. Here are some tips to help you follow up on your collection strategy and get paid.
Once you have decided what your collection strategy will be and each step that you want your collection representatives to take, then you need to document it. The more detailed and step-by-step you can get, the easier it will be for you team to follow and less mistakes they will make. Make sure to post this somewhere that is easily accessible by your team, such as a common folder or internal sharepoint site.
Make sure that every collection representative reads and understands your collection strategy. One way to do this is to have them sign the document after you have distributed it. Once everyone has read and acknowledged it, you need to hold your collection representatives accountable. If you know that they aren’t following the strategy that you have created, you need to talk with them and understand the consequences of not meeting the collection strategy guidelines.
When you are implementing the collection strategy, take note of your previous KPIs and KPIs after using the collection strategy. Note any changes, whether good or bad, and address them. If you don’t see any changes in some areas, you may need to tweak your collection strategy again. You may not get the strategy right on the first time and go back and find new processes to get paid quickly.
What makes a collection strategy help you get paid faster is by documenting how often a collection representative should be following up with customers. No matter how many times you tell them to do it, if they simply don’t have time to get to all their calls it won’t work. Using an automated accounts receivable software eliminates manual tasks and frees up time for collection representatives to get on the phone and make important follow up calls. Instead of sending emails one by one to each customer, it is done for them. Additionally, accounts receivable software can tell the collection representatives exactly who they need to call next, when and what for.
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If your company struggles with timely B2B invoice collection, it may be because your customers are choosing to pay other vendors before you. You are not your customer’s only vendor and your invoice is not the only one they need to pay; but someone has to get paid first- why shouldn’t it be you? Think […]
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WHAT WE DO
Anytime Collect is a leading CLOUD-BASED accounts receivable software. Made specifically for businesses selling on credit terms, Anytime Collect AUTOMATES invoice dispute management, cash forecasting, customer communications, invoice presentment, online bill pay and credit management. The entire collections process becomes QUICKER AND EASIER.