Take the Holistic Approach to Improve Collection Performance
by Robert S. Shultz
Your company is experiencing an increase in Days Sales Outstanding.
Customers, who have paid at, or near terms, are now paying slow. Customer
deductions and disputes are increasing. The perception is the credit
and collection department is the primary place to look to get cash
flow back on track. This scenario sounds all too familiar to many credit
and financial professionals today.
The traditional reaction is to review credit policies and tighten where possible.
The Credit Department must do what is necessary to reduce risk of slow payment
and potential bad debts. The collection process and supporting staff are scrutinized
in an effort to find where the ball is being dropped and what corrective actions
All this makes perfect sense, but in today's business environment, these steps
focus only on part of the picture. It is critical to go upstream in the quote
to cash process. There is a chain of interrelated steps that drive what ultimately
becomes an open item on the Aged Trial Balance. This goes far beyond the walls
of the credit and collections department. The effort must involve all areas
of the business. Pricing and terms policies, product quality, administration
of product delivery and return, order entry, billing and cash application all
impact a company's ability to manage incoming cash flow.
The "holistic" approach integrates the entire "revenue chain" and involves
all parts of the organization. This requires a review of interrelated processes,
organizational structure and supporting systems and automation. Results will
be collection performance improvement, better management of credit risk, a
more efficient and productive operation as well as reductions in overhead costs,
administrative errors and invoice discrepancies.
Following are ideas as to how to effectively approach this issue by coordinating
other areas within the company. Actions can be taken to improve collection
performance at each step of the quote to cash process.
Pricing and Terms of Sale
In tough times, Sales and Marketing uses credit terms and aggressive
pricing as a tool to gain market share. It is the responsibility of a
Chief Financial Officer to ensure that the credit manager works within
this framework and is part of the effort to increase company revenues.
However, it is a two way street. The company's cash flow requirements,
administrative capacity and costs must be part of the equation. Coordination
and a high level of communication between sales and credit and collections
Complex or dynamic pricing policies create a sales administration nightmare.
It is critical for Sales Administration and Credit and Collections to
play a part in how these policies are formulated. Competitive deals are
needed to gain market share. However, if for example, systems supporting
pricing tables are not there, the result is manual effort and misunderstanding.
This affects both internal operations and even worse, relations between
the company and its' customers.
As pricing and terms policies are being developed all parties responsible
for dealing with the aftermath need to participate. The credit manager
needs to raise issues and help come up with solutions.
Any company granting trade credit is a slave to two masters. One is the
cost of funds and lost working capital opportunity and the other is the
risk of non-payment by debtors. Extended terms have both a cost and a
risk that should be quantified as deals are being developed. The result
will be knowledge based business decisions that consider both the competitive
marketplace and the financial consequences.
Credit Approval and Review
A credit policy must address both the company's need to generate revenue
and the level of risk necessary to remain competitive and meet financial
credit policy cannot be developed in a vacuum.
The credit manager must be involved from the start and thoroughly understand
the company's objectives and channels of sale. The needs of all areas in the
should be considered.
There will always be exceptions. The basis for making "business decisions" on
an exception basis should be part of the policy. It is essential for the policy
to be signed off and supported by senior management of each area involved. Yes,
this includes Sales. Once the policy is agreed to the road map is set.
The Credit Manager must be part of the sales process. It is to sales' advantage
to include the credit manager as new channels or customer relationships are being
contemplated. A preliminary credit review of sales prospects can help sales understand
the customer's potential and if special credit arrangements may be required.
Complete information on the customer is critical if there is a collection issue.
The information on the credit application becomes a valuable resource to contact
the company's principal or a senior executive, bank contacts or other trade partners
originally listed as trade references.
It is much better for everyone, including the customer, to know about special
requirements up -front. Why waste precious sales time on accounts with low potential.
If cash terms or some form of security will be required, it is better to communicate
this before the sale is in the forecast.
The credit manager must enter the discussion with an attitude of "we never say
no, we say yes but how". With this in place credit will no longer be perceived
by sales as the "sales prevention department" or some obscure accounting function.
The aim is to motivate sales to seek information from the credit department
by being solutions oriented.
Sales must understand both the risks and opportunities that come with the sale.
There is the story about the Sales Manager who was upset with the Credit Manager
for turning down credit approval on a hot prospect. Several weeks later the
Sales Manager learned the target company shut its' doors. At the next sales
he explained to his team, "I was angry because there was no commission to buy
the new car I wanted. Now I realize the Credit Manager saved my mortgage"
Continued credit worthiness must be reviewed on an ongoing basis, both at the
customer and portfolio level. This will help to direct sales towards high potential
channels and customers and also identify areas with a high risk of delayed payment
or bad debt.
There are excellent software tools in the marketplace to customize credit policies
and automate the analysis. The credit manager can incorporate in the evaluation
financial information, historical payment data and ratings from major trade credit
organizations. Subjective criteria important to the analysts can be weighted
the model as well.
Examples of when a review should take place:
Periodically based on the dynamics of the market.
(quarterly, biannually, but at a minimum annually)
If there is a significant increase in sales volume
If the payment pattern shows deterioration
Negative financial results reported
Poor trade ratings from industry trade interchange groups or rating services
Change in senior management or ownership
High number of trade reference requests
An effective credit hold is no secret
The credit-hold process should be well communicated within the organization.
The extent to which customers are given advance notice and the degree to which
salespeople are used for collection, varies between industries. It is critical
however for sales to know a credit hold is being imposed. This should be communicated
in advance as the situation allows.
For maximum effect, when a credit hold is imposed, pending shipments are held
and order taking is stopped. Most companies handle this manually. Administering
this process effectively is critical to both motivate slow payers to pay current
and to reduce the risk of non-payment. To the extent that the credit hold process
can be incorporated into system based controls it should be.
Education, Education, Education Credit professionals should take advantage of
networking and trade interchange groups such as those offered by Affiliates of
the National Association of Credit Management (NACM) and Reimer. This helps keep
the pulse on customer risk and industry trends. The NACM Professional Certification
Program provides excellent education opport unities.
Order administration accuracy and integration with company pricing, terms and
credit policies is key. This is where administrative discrepancies begin. As
companies migrate to electronic data interchange and transaction volumes increase,
problems reach a new level of complexity and financial impact. For example, if
stale dated pricing or incorrect terms or product codes are used, the invoice
simply won't be right. If the invoice is wrong the customer will short pay, deduct
worse use the discrepancy as an excuse not to pay at all.
Processes and system safeguards need to be in place to reduce the opportunity
for error. If errors occur there needs to be timely visibility so corrections
can be made. Aside from the internal impact and cash flow consequences, this
is critical to customer care. Everyone in the organization must work together
do it right the first time.
In order for billing activity to flow smoothly through the customer's accounts
payable process, it is critical that all information on the invoice be accurate.
This starts with an accurate customer master. If customer contact information
or bill to and ship to detail are inaccurate errors and delays will result
Most billing today is accomplished with paper invoices. As billing is converted
to an electronic format it is essential for both parties in the transaction to
do thorough upfront work. This will insure both the buyer and seller's system
For those transactions billed by hardcopy invoice there are pitfalls that can
Eliminate delays in mailing the invoice. Depending on how the customer's
accounts payable policy and system are set up, the date of receipt of invoice
may have a lot to do with when payment is made. Timely mailing is particularly
important in industries with short terms of sale.
Clearly state the terms of sale or due date on the invoice.
As simple as it sounds, make sure the invoice is sent to right location.
Clearly state the "remit to" address.
Avoid payments coming directly to the office. Do not include the company
address on the invoice. A contact phone number/email address will suffice.
Checks sent to a bank lockbox are deposited faster. Checks going to offices
get lost or worse, they can be intercepted and fraud becomes an issue. Question
the need for statements
Companies pay invoices. Statements may clutter the desk in accounts payable and
take away valuable processing time.
If there is a high volume of invoice activity consider providing the customer
a summary invoice. With proper backup this can reduce the time required for accounts
payable to process payments.
Accuracy cannot be overemphasized
Determine root causes if there are repetitive errors in pricing, product
description, quantity, ship to location etc. Quantify the issue and report
the problem quickly to all appropriate areas in the organization. Put a
meeting together if necessary to brainstorm corrective action and fix the
Migrate to electronic bill presentment
This saves processing time and increases staff productivity. Technologies are
available that eliminate mail delay and automate the billing payment relationship.
The Internet has opened electronic interchange as a practical solution to companies
of any size. Although this does not fit every industry or customer relationship
opportunities should be sought after.
The customer relationship is a critical component of cash flow and risk management.
People not technology, ultimately handle exceptions, respond to questions and
go the extra mile when asked. Attention to customer needs is critical. Any process
step, document or personal contact directly between the company and the customer
must be continually reviewed and adjusted to address customer requirements.
This takes good communication with the customer and internally between all
areas servicing "customer facing" processes.
Organize sales, customer service, collection, dispute reconciliation and
cash application teams with common customer assignments.
If a team approach is taken issues will be addressed from all critical viewpoints.
Develop people in each functional area as sp ecialists for specific customers,
types of customers or customers within particular regions. Emphasize cross-functional
communication and problem solving. The aim is to provide one face to the
customer no matter the issue.
Most payments are still made by check. In spite of technological advances the
number of checks processed through the US banking system each year continues
to increase. The best defense against today's sophisticated disbursement tactics
are strategically located lockboxes. Mail float delay is a factor in cash flow
for both buyer and seller. By understanding where payments are coming from, the
creditor can establish banking arrangements to minimize mail float.
Major lockbox banks provide scanning and same day online viewing of remittance
advice. This allows for payments to be deposited as delivered and provides cash
appliers and collectors the ability to review remittances in advance of hard
Scanned or electronically imaged remittance detail can be archived for future
research. There are choices on how to access the information, by the Internet;
or the bank can provide a CD or other electronic record.
Autocash arrangements facilitate application of customer remittance detail directly
to the accounts receivable system. If there is a high degree in item matching
this can drastically reduce the need for cash applications headcount and speed
up the process.
There are excellent service providers among the lock box banks. In some industries
credit card sales can provide third party resource, particularly on low dollar,
Take advantage of data on remittance detail
The customer identifies process and product issues each time a deduction
is taken. Tie this valuable information into your process improvement efforts.
By understanding root causes as early in the process as possible, the credit
professional can provide valuable information throughout the organization.
Data gathered will also provide agenda topics for cross-functional process
Collections and Dispute Resolution
Many companies make a mistake by not distinguishing between what is required
by the accounting function and collections. Effective collection requires actionable
information. The collector and manager must have easy access to up to date information
on each customer such as, the outstanding balance, aging, associated risk, payment
history, promises made, open disputes and notes of recent contacts.
Tools must be available to both collectors and management to prioritize contacts.
The workday should be structured to maximize customer contact and follow-up.
Good account coverage is needed, however, collectors should not spend valuable
contacting volunteer payers or performing unnecessary clerical tasks.
Major ERP solutions provide collection and deduction management capabilities
a limited degree. For both ERP users and smaller organizations there are scalable "bolt
on" solutions in the marketplace with a wide-range of functionality.
These systems provide access to anyone in the organization with a need to know.
The Internet opens information to field or home offices and also enables customers
to access their own activity. Providing self-help tools within the company and
to customers improves productivity and saves time.
Key functionality to look for includes:
Ability to assign groups of accounts to a collector or reconciliation analyst
Ability to define optimal collection strategies based on a customer's level
of risk and payment habits.
Daily prompting of collection contacts applying strategies to open balances.
Allow user to enter contact notes with automated tools to reduce keystrokes.
Automatic prompting for followup on promises
Provide the option to contact by phone, or customizable fax, email or letter.
If the need is there, provide autodial capability
Provide problem resolution work- flow tools that allow user to assign problem
reason codes and identify the responsible resolver in the organization.
Track historical information such as customer payment history, disputes
by type, status and timeframe fromidentification to resolution.
Ability for authorized individuals in the company or the customer to access
account information and obtain copies of documents such as invoices, credit
memos, statements etc.
Robust management reporting tools.
Eliminate Paper based research
There are services in the marketplace that can archive documents and provide
authorized users with Internet access. Using indexing techniques, data elements
can be rearranged to provide ad-hoc reports for use in customer dispute research
or even for sales and marketing purposes. These services can accept hardcopy
documents for scanning, CD's or tapes or electronic file transfers.
Use of this technology can save significant time in research and resolving
disputes. This provides additional time for collection staff to focus on
cash generating tasks.
Visit customers regularly
A good relationship with the customer can be the distinguishing factor between
creditors who get paid on time and those who do not. It is important for a
variety of reasons to conduct on-site visits. You are no longer just a voice
on the phone. By being at the customer's location, you get a first hand look
at the level of activity and get to meet the staff and review customer processes.
You learn something on every visit.
If resources allow, the credit collections manager should consider also bringing
the collector or the deduction specialist.
Additionally, a team effort, including sales, customer service, operations
and information technology, may be the best way to resolve process or systems
issues involving both parties. This of course depends on the size and complexity
of the relationship and the perceived payback.
Sales can provide a set of ears and eyes in the field for the collection organization.
Participate in Sales Team meetings. Communicate issues involving their accounts.
Seek sales input and help them understand how important it is to report back
you on changes in customer condition or other cash flow related issues.
Establish metrics that define success in collections and dispute resolution.
Keep in mind that everyone within the quote to cash process should have skin
in the game. This includes sales, operations and customer service as well as
It is interesting to report total Days Sales Outstanding (DSO) and to provide
detail on the DSO current to terms, disputed and past due. This can be a real
eye-opener to Senior Management who might not be aware of the impact of extended
terms or the carrying cost of disputes.
Some metric examples:
Utilize strategic outsourcing and stick to core competencies that have a pay
Review collection and reconciliation activity to find areas that are best
outsourced to a competent third party. In these times of tight staffs and
budgets, collection departments need to focus on critical customer relationships
and transactions. Review low dollar activity, non-strategic accounts and
seasonal volume fluctuations. These can be handled by a third party and will
probably save the company money.
Provide incentives for targets to be met or exceeded
Incentives should be structured to include all who impact target achievement.
This will also serve to bring different areas of the organization together
as a team. Remember to have fun in the process. Targets should be a stretch
but fair, achievable and be focused on group rather than individual performance.
To have a significant impact on incoming cash and collection results all parts
of the organization must be devoted to the effort. Depending on the issue at
hand, this could involve sales and marketing, operations, customer service,
credit and collections, accounting and finance.
The company's credit and collection policies should address customer needs
and the company's sales, and marketing and financial goals. Guidelines and
exception policies should define acceptable terms of sale and credit risks.
A mandate is required from senior management to make all this happen.
Using the "holistic" approach, issues can be quickly identified and cross-functional
efforts employed toward improvements. As one of the few in the organization
with visibility to all the factors involved, the credit professional can be
utilized as a leader in the improvement effort.
Reprinted by permission from Trade Vendor Quarterly Blakeley & Blakeley
LLP Spring 03