Save Money through Collection Automation

Businesses that extend credit to their customers incur operating costs as a result. This includes billing and collection expenses, as well as the cost of the working capital needed to finance the receivables. According to industry analysts PayStream Advisors, companies that employ collection automation technology such as Anytime Collect can realize: 

  • 10 to 20 percent reduction in Days Sales Outstanding (DSO)
  • 25 percent reduction in past due receivables
  • 15 to 25 percent reduction in bad debt reserves
  • Increased cash availability
  • Increased productivity and ability to hold down staffing costs

Here is an example of the savings a typical mid-sized business could achieve though automation.

Current A/R Balance $1,500,000
Annual credit sales $12,000,000
Borrowing cost of working capital 6%
Write-offs as a percentage of sales 4%
   
Calculated DSO 45.00
AR Financing cost $90,000
Write-off amount $480,000
Write-off percentage 4.00%
   
Projected DSO reduction 10%
Projected Write-off reduction 5%
   
New DSO 40.50
Estimated annual saving in financing cost $9,000
Estimated annual saving in write-offs $24,000
Estimated additional cash availability $150,000
   
TOTAL ANNUAL COST SAVINGS $33,000

 

Your actual performance improvement may vary, and it’s somewhat dependent on how effective you are currently – if your DSO is already at 32 you can’t expect a lot of improvement but if it’s 60 then there’s lots of room. An interactive ROI calculator that lets you set some of the key parameters in this analysis is available at http://www.anytimecollect.com/AnytimeCollectROICalc.html.

This calculator also makes some assumptions about the cost of acquiring and implementing collection automation software to estimate a Return on Investment and Payback Period. The cost estimate is based on a typical configuration of Anytime Collect for different numbers of users in a credit or finance organization.  Using the above example, a two-person team could achieve ROI of over 800% with a payback in less than two months.  Having three users increases the cost but the ROI is still about 300% with a payback in approximately three months. There are very few IT investments that generate this level of return this quickly.

One final thought: in collections, if you don’t ask for the money, you don’t get the money. Doing it efficiently and effectively contributes directly to the bottom line in more ways than one.

The First Collection Contact

You have sent your customer an invoice with payment due several days ago. It’s time to make your first contact to find out why the invoice has not been paid, but should you pick up the phone and call or do you send them a letter, a fax or an email?

As I said, the purpose of the first contact, which should happen when the invoice is 3-5 days past due, is to initiate a dialog and find out why the payment is late. You are asking for information and not demanding a payment. You do not want to introduce an adversarial or confrontational tone to the discussion at this stage. In many cases, particularly for larger customers, an invoice with a problem of some kind will sit until you initiate contact to get the matter resolved.

Ideally this first contact is made by phone. A two-way conversation with the right party can get to the point very quickly. However, not every business has the resources to call every past due customer in a timely manner and in many cases it is difficult to reach a knowledgeable person at your customer, especially if it is a very small business and you are trying to reach the owner. It is appropriate to send a written request for information for invoices less than a specific dollar amount, bypassing the initial attempt to reach them by phone, or for customers where you have left two messages and not been called back.

This written communication should be very brief and to the point: “Payment for invoice 1234 was due on March 15 but as of today we have not received payment. Can you please take a moment to complete the bottom portion of this letter and return it to me or, if it’s more convenient, give me a quick call to discuss the matter.” Provide a phone number, fax number, mailing address and email address on the letter. The letter will have the same content regardless of how it is sent.

A critical element of the letter is the checklist you have provided for their response. Providing an easy form for your customer to complete will speed up resolution. The specifics can be tailored to your industry and customer base but might include some of the following options:

· Payment was mailed on _____________ by check number ____________

· Payment is scheduled for ______________

· Invoice not received. Please provide a copy.

· Need Proof of Delivery in order to process for payment.

· Need approved time sheets in order to process for payment.

· Need Purchase Order number (or copy of PO) in order to process for payment.

· Other reason: ____________________________________

The next question is whether to send this letter by postal mail, fax or email. There are advantages and disadvantages to each.

· Mail is more expensive because of materials cost and postage and takes longer to get there. However, a professional looking envelope sent to the Accounts Payable Department of any business will be opened and read. Further, you will be notified if the mail is undeliverable – potentially a serious problem – and can request “Address Service” to be informed by the Postal Service (for a small fee) that mail is being forwarded, allowing you to update your records.

· Fax requires that you have a working fax number for the business that goes to the right department.  Some small businesses do not have fax lines and large corporations can have many.  Ideally you would have requested a fax number on your credit application or order form but that does not always happen. Depending on your office equipment, sending a fax can take significant effort and may be just as costly as mail.

· Email is easy, fast and inexpensive but does not always get to the right person.  Email can be easily ignored, blocked by spam filters or sent to a generic address (info@somecompany.com) and wind up nowhere.   Also, the email address on file is often the purchaser and not the Accounts Payable department.

My recommendation is to use email only if you have the personal email address of a responsible individual that you have reason to believe will receive and read your emails. You might want to test that by sending a “welcome” email to new customers and asking for a response of some kind to verify that it was read. Send a fax if it’s easy to do so and the customer has provided a fax number for their accounting or accounts payable department. Mail works in every other case.

Follow up on these communications. Give the customer no more than five business days to respond to a letter or three days to respond to an email or fax. If they do not respond within this time move to the next step in your collection process, which could be a phone call or, for smaller transactions, an initial demand letter. A second written communication should be sent by mail and not by fax or email.

One final thought: in collections if you don’t ask for the money you don’t get the money. Understanding where you stand in the payment process is essential for getting paid for the work you do. Remember – you’re a business, not a bank!

Collection Call Tips

In most small businesses the person who is responsible for making collection calls is not a full-time professional collector but is someone with significant other responsibilities – a bookkeeper, salesperson or even the business owner. Here are some tips for making effective collection calls while maintaining good customer relationships.

Preparation. In order for any call to be effective you need to have relevant supporting information readily available, including:

  • The invoice(s) you are calling about plus any supporting documentation (proof of delivery, purchase order, etc.)
  • Notes from prior contacts regarding this invoice (if any)
  • Customer account status: other open invoices and past payment history
  • Customer contact: who to call and their phone number

You will want to set an objective regarding the call. Generally you will be looking for specific information or a commitment for a specific follow-up action to be performed by the customer or yourself.

The initial call. This is your first contact with a customer regarding a past due invoice. You will have already sent the invoice and possibly a past-due reminder by mail or email. The objective of this call is to determine the status of the payment and identify any issues that may be delaying that payment. In your own words introduce yourself and cover the following points:

  1. I’m calling from XYZ Company regarding our invoice number 1234 for $999 that was due on March 15. Have you sent payment for this yet?
  2. If so, ask for the check number and date it was mailed.
  3. If not, confirm they have the invoice and ask when it is scheduled for payment.
  4. If any issues or problems are mentioned get as much information as possible so you can follow up as appropriate. Tracking and managing disputes is a complex issue and will be the subject of a future article. Stay tuned.
  5. Get the name and title of the person you spoke with.

Record notes of the key points of the call: time and date as well as any promises made by the customer. Mark your calendar to follow up these promises. Since most accounting systems have limited capabilities for entering notes or activities you might consider using collection management software for this purpose so that this information can be shared among all individuals within your company that need to know what’s happening with a customer.

Voice Mail. Frequently you will call a company and get the voice mail of the person you need to speak with. When that happens leave a brief message:

  1. I’m calling from XYZ Company regarding our invoice number 1234 for $999 that was due on March 15.
  2. Could you please call me back and let me know when this is scheduled for payment?
  3. Leave your name and phone number. Be sure to state the call back number clearly.

If you have the email address or a fax number for the person (or department) you are calling send a note stating that you have just left them a message, restate the above points and attach a copy of the invoice in question. Make a note of the call and the email or fax you sent. If collecting on this invoice is a priority mark your calendar for a follow up call in 2-3 days.

Demand Calls. If your voice messages and emails are ignored and your customer’s promises are not kept it’s time to get more forceful and ask for payment of the invoice. You need to be firm yet courteous and sell your customer that they need to make a payment. This is a three-step process:

  1. Ask why you have not been paid. Show understanding and sympathize with the customer. This may catch them off guard and is particularly effective when the customer is experiencing financial stress in their business. Aren’t we all?
  2. Convince them that they have an obligation to pay you. Reiterate that the invoice for $999 was due on March 15 and remind them of any prior promises to pay that they made. Unless they push back with an objection or complaint, here is where you get implied agreement that they owe you the money.
  3. Propose a specific payment action on their part that is realistic given what you have learned. Can you send me a check for the $999 on May 1? Can you pay $500 today and the balance in 30 days? Do not ask them how much they can pay and when — that gives up control of the conversation and opens it up for unrealistic or unreasonable suggestions. If you have the ability to accept credit card or electronic check (echeck) payments over the phone you should present that option. Some collectors are authorized to offer small discounts (usually 10-20%, but sometimes more) if the customer can make immediate electronic payment in full. Establish in advance company policy and guidelines regarding discounts and settlements.

As always, take careful notes and document the conversation and all commitments made by both parties. If you must leave a message I recommend not providing extensive details about the reason for the call (they know why you’re calling) – just ask for a call back.

One final thought: in collections if you don’t ask for the money you don’t get the money. Professional and timely follow-up of your unpaid invoices is an essential part of the process of getting paid for the work you do. Remember – you’re a business, not a bank!