In today’s aggressive and unpredictable economy, financial leaders recognize DSO (Days Sales Outstanding) as the basic KPI to evaluate performance of accounts receivables. Predictably, Collections Management lies at the heart of driving your CFO’s DSO reduction agenda.
Research on more than 500 receivables projects has concluded that credit and A/R leaders are more likely to positively impact A/R if they start with an assessment of their collections operation maturity on factors including people, processes, data, collaboration, and technology.
The Collections Operations Maturity Model has been devised to help finance decision makers perform an in-depth evaluation of their current operations and identify clear next steps to advance up the maturity pyramid.
HighRadius recently hosted a webinar on ‘The Collections Operations Maturity Model: How Leading A/R Teams Lower DSO by Enabling People, Process, Data, Collaboration, and Technology’. The discussion between the audience and the speaker Jay Tchakarov, Vice President, Product Management and Marketing at HighRadius and an A/R technology expert focused on:
- Top questions to answer in order to classify your operations on the maturity model – from Ad Hoc to Proactive
- Key considerations to evaluate your process on the parameters of people, process design, data-based decision-making, cross-team collaboration and technology
- Next steps and timelines for progressing from one maturity level to another
- Essential elements to fundamentally transform collections management from a reactive process to a proactive one
Before we discuss the collections management maturity model, let’s look at the five factors that impact collections at your company.
The 5 Pillars of the Collections Process
Traditionally, the collections process has been riddled with pitfalls due to extensive manual intervention, lack of real-time insights, limited internal and external collaboration, and inefficiencies due to non-standardized operations. The following explores the key factors which define the success graph of the collections process:
Collections operations in most organizations are people-driven rather than process driven, the disadvantage of this is that the organization is too dependent on people to drive collections.
Making sure that people do not inhibit the ability to scale the collections process is one of the most important concerns of an A/R manager.
A noticeable turnover in the collections staff with increasing invoice volume could destroy the DSO of the company as it indicates a disorganized and sloppy collections process.
The traditional collections management paradigm relies heavily on the skill and speed of individual collectors. Moreover, the collectors need to be educated with A/R, credit and collections best practices, the laws and regulations with respect to customer correspondence, and management skills.
The collections team routinely interacts with the credit department, sales and the A/R team. Along with internal collaboration, correspondence with the customers lies at the epicenter of collections process. The key question here is:
- How do they collaborate with internal and external stakeholders?
The more transparent, well-logged and seamless this correspondence is, the easier and faster the collection operations will be.
Collectors need to collaborate with team members in the cash application function, the credit department and the deductions team for details on open A/R, credit scores, risk categories and disputed invoices. Customer Correspondence is the complex, sensitive and strategic as it depends on various factors including preferred mode of communication, type of customer (fast-paying/ slow-paying) and risk category of the account.
Data serves as a fuel to the collections engine. This includes open A/R data, credit scores, payment commitments and so on. The key question here is
- How is information recorded and how is it retrieved when needed?
Because of the diversity in type and content of data, a single format is insufficient to store the data. Moreover, for a stable and seamless collections process, it is important to have a single source of data without having to deal with disparate points of reference to carry out their routine tasks.
The shortfalls in the collections process include untimely or incorrect invoice delivery; inaccurate or unclear payment terms; delayed, wrong or faulty items’ shipment and Accounts Payable(A/P) not receiving the invoice.
Using age or invoice value as the driver of collections prioritization leads to unworked, current, high-risk receivables rolling into past due buckets.
The collections process should further address the challenges with disputed invoices, monitoring and reporting, and creating a data model (centralized or regional) that serves the needs of the company best.
The key questions here are:
- The manner in which the customers are shortlisted
- Is the process the most optimized?
While using technology for automating collections process is the current trend, a misguided decision on the ‘right’ technology could be the Achilles heel for a company’s receivables. The ‘right’ technology provides an efficient, compliant and cost-effective process.
An effective automation ensures dynamic account prioritization, facilitates monitoring customer correspondence, logs all information, leaves room for reporting and provides functionalities including reminders and notes to ease the workload of collectors
According to a study by the Customer Value Group the average time it takes for a collector to handle a communication with ERP is much longer than if they were using a specialized accounts receivable management system. The information from their study is in the table below:
As made evident in the above study, with the right auto-communication feature in A/R management software, companies can just about cut the time spent on a single piece of correspondence by half and increase your productivity by about 50%!
Alert! The automation technology by its name does seem pretty lucrative but it may involve risk and exposure to power failure, computer viruses, and hackers who can corrupt or worse steal data from the software if proper precautionary and security measures are not in place.
THE COLLECTIONS MATURITY MODEL
The collections process is no mean feat. Growth in businesses, through organic and inorganic expansion, has only meant more demand leading to more transactions and a rise in a number of customers ensuring chaos in accounts receivables. The collections challenge is clearly not going away. A great deal of insight into the future of collections management could be gained by looking at how collection process has matured over the years based on the key success factors.
The Collections Maturity Model
The Collections Maturity Model characterizes the evolution of collections operation into these 4 processes:
- Ad-hoc Process
- Reactive Process
- Preventive Process
- Proactive Process
The Ad-hoc Process
Companies who are ad-hoc in their collection management practices are highly dependent on people in terms of skill, experience, and expertise in their day-to-day collections operations. They are in the infancy stages of putting processes and technology in place, to better manage and take control of accounts receivable.
If your company was evaluated as Ad Hoc in the Collections Management Maturity Model, it is likely that you have trouble effectively managing past-due A/R and insufficient internal resources is the factor to blame. Typically, your people’s time is spent on maintaining spreadsheets on accounts with past-due A/R and calling these customers to get paid. The analysts don’t have the latest information on credit limits, open deductions, cash posting data and blocked orders, all of which affect account prioritization while contacting the customer.
Companies with ad-hoc process usually do not communicate or collaborate effectively with other departments within their own company or with key customers.
The Reactive Process
Companies who find themselves reactive in their collection management practices are mostly dependent on people in terms of skill, experience, and expertise for their day-to-day collections operations but may be beginning to address the ‘process’ elements. They are in the infancy stages of putting technology in place, to better manage collections operations but unknowingly commit collections disasters.
If your company was evaluated as Reactive in the Collections Management Maturity Model, you are most likely “chasing” past-due A/R and usually, the process is triggered only after the account goes past-due. There might be documents on customer contact strategy and collection segments but A/R teams ultimately rely on collection analysts to implement these strategies and there is very basic support in the form of systems.
Companies that are classified as reactive in the collections management maturity model rely on aging lists and customer master data from ERPs to call customers for collections on a day to day basis.
There is most likely either a limited or no process in place to routinely and proactively reach out and communicate with key accounts.
The Preventive Process
Companies who find themselves managing collections at the Preventive level are generally quite efficient when it comes to the people and the process and are starting to leverage technology to automate manual work related to collections.
If your company was evaluated as Preventive on the Collections Management Maturity Model, you most likely have systems where you could set collection segments and strategies and integrate data with other A/R teams. The analysts would no longer need to prepare a worklist on ‘who to contact’ as the system provide a worklist. However, this prioritization is still static based on factors like ADD which may not be very efficient in prioritizing accounts.
Additionally, some part of the customer correspondence would have shifted to emails from calls so that the account coverage on any given day could increase with customized templates. Companies that are classified as preventive on the collections management maturity model rely on systems specifically designed for collections to achieve automation of 30%-40%.
While there are specialized systems and processes, collections management is still a problem as the systems don’t solve the major problem of collaboration with the customer accounts payable team. The A/R team doesn’t provide any autonomous self-service portal for downloading invoices and collaboration on dispute cases and promise to pays.
The Proactive Process
Companies who find themselves managing collections at the proactive level leverage people, process and technology for their business operations and are knocking all of them out of the park! They have optimized collections operations and are doing everything right, or at least have a plan in place to do so.
If your company was evaluated as proactive on the Collections Management Maturity Model, you have all upstream processes including credit, deductions and cash application integrated into the collections system so that the collections analysts have all the critical information on any account at any point of time. Additionally, collections analysts effectively leverage email automation to scale communication and prevent collections from falling through the cracks especially for small and medium businesses who make up for up to 80% of the volume. The system is also powered by predictive analytics so that the analyst is presented at risk invoices that are likely to be paid late so that the analysts can proactively follow-up with customers and prevent late payments. The analysts are also empowered with tools to offer early payment discounts and reduce DSO.
Additionally, they collaborate better with buyer A/P teams using self-service systems for invoicing, dispute resolution and payments.
The people and processes are efficient because the company is technology savvy, automates manual tasks, drives standardization throughout the organization, scales cash forecasting and ensures seamless collaboration with customer accounts payable teams. The organization has a high level of visibility into operations and reporting capabilities.
Learn more about how to identify where your collections team and process stands in the Collections Maturity Model