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5 Ways to Improve Your Accounts Receivable Debt Collection Process
When a business sells goods or services on credit, it expects to be paid eventually — but that “eventually” can sometimes take longer than it should. That’s where collections come in. In accounts receivable (AR), collections is the process of recovering outstanding payments from customers. Collections typically begin once an invoice goes past its due date and can range from a simple reminder email to more serious actions like involving a collections agency.
Unfortunately, many businesses struggle with inefficient, manual processes that delay follow-up, overlook high-priority invoices or damage customer relationships. In this post, we’ll explore five practical ways to improve your AR collections strategy and get paid faster — without burning bridges.
What are collections in accounts receivable?
In super simple terms, B2B accounts receivable collections means one business is trying to get another business to pay the money they owe. For example, if a store buys products from a supplier but doesn’t pay right away, the supplier will contact the store later to ask for the money. It’s like when you lend a friend money and have to remind them to pay you back — but instead of between individual people, it happens between companies.
Accounts receivable collections process steps
Create an aging report
When a supplier sends an invoice to their customer, it starts a timer. The customer has a certain number of days to pay the invoice (60 days, for example) before the payment is considered late. Each day that passes, the timer runs down and the invoice “ages” a bit more.
An aging report pulls together all your unpaid invoices and sorts them by which ones are latest or contain the highest monetary amounts. It’s an extremely helpful tool for understanding what your unpaid invoice picture looks like and is a key component of prioritizing your collections efforts.
Send payment reminders
Sometimes a late payment is an honest mistake — perhaps the invoice got overlooked, forgotten or lost in the shuffle. It happens to the best of us. Payment reminders are friendly nudges sent shortly before payment is due to help ensure timely payment. If a payment is only slightly overdue, a supplier may send a few past due notices in the hopes the customer will pay without needing to resort to more severe measures.
Send a dunning letter
If a payment is obviously late and no payment is expected imminently, it’s time to get serious. A dunning letter is a more formal and assertive payment reminder as well as a demand for payment that usually mentions the consequences of not paying the invoice, like late fees or legal action.
Negotiate
If no payment comes after a dunning letter, it’s time to have a talk with your client. Find out what’s going on and why they haven’t paid. This conversation is an opportunity to collaborate with your client to resolve the issue without damaging your working relationship. Offer solutions, such as flexible payment options or a new payment plan — and make sure to document any new agreement in writing. Follow up to make sure things are running smoothly or if new issues have arisen that could impact payment.
Refer the debt to a collections agency
If negotiations fail, you can turn the debt over to a reputable collections agency. Make sure they know all of the actions you’ve taken thus far to recover the debt, including documentation. The agency will take it from there. If the agency is unable to collect the debt, you may want to consider legal action (if the amount is sizable) or write it off (for smaller amounts or if there’s no way the debt will ever be recovered).
5 ways to improve accounts receivables collections
Be proactive, not reactive
The best collections strategy is one where you don’t have to resort to more serious measures because you’ve started chasing payments before they’re late. Clearly prioritize your outstanding invoices. Then communicate before the invoice is due and continue communicating after the due date has passed. The longer you wait, the less likely you’ll collect payment.
Personalize dunning letters
This is not the time to be generic. Understand each customer’s unique preferences and situation regarding their ability to pay and tailor your communication accordingly. Showing that you actually know and care about your customer’s situation goes a long way towards preventing frustration, collecting the payment and preserving customer loyalty.
Automate the collections outreach process
Manual collections outreach is synonymous with disjointed and sometimes poorly timed communication and follow-up. For example, payment reminders can go out after a payment has already been received. Or a dunning letter is sent even though the customer is disputing the invoice and the dispute must be resolved before moving forward with collections. Manual processes also take longer to collect payments, hurting the company’s cashflow.
Trying to manage the complexity of collections with spreadsheets and email is extremely challenging and can often result in mistakes. Automating the AR collections process can help you better time and customize your communication efforts for better results.
Centralize customer data
Collecting a payment without all the data related to the invoice and customer is like trying to shoot a target while blindfolded. Having information like what the order contained, what the invoice due date was, when the invoice was sent and the customer’s payment history all in one place makes it easier to strategize your next move and resolve any disputes quickly. Because as you can imagine, prolonged collections and dispute resolution can seriously strain your customer relationships.
Be data-driven
Knowing is always better than guessing. Make sure you’re set up to track how your team is doing. Once you understand your current performance levels, set clear goals for improvement. A good place to start is by reducing the number of overdue invoices. A great longer-term goal is to decrease days sales outstanding (DSO) or the average delay in payment.
How collections management software helps
According to the latest Atradius Payment Practices Barometer, half of all B2B invoices in the U.S. are currently overdue. And 8% of invoices are written off as bad debt. That’s a lot of money not making it back into your company’s coffers.
Thankfully, the collections process is an area where an AI-driven automation platform like Esker can have a hugely positive impact. How? We’re so glad you asked!
- Streamlines the collections process: It automatically sends communications to your customers based on your pre-defined collections strategy and provides your team with real-time, prioritized to-do lists of customers to contact.
- Centralizes your data: All necessary information (e.g., customer data, PDF invoices, collection calls history and notes, disputes, tasks, etc.) is accessible anytime, anywhere, all from one centralized and easy-to-use interface.
- Monitors performance: Intelligent dashboards display real-time KPIs to monitor collections performance (e.g., aging reports, collections forecast, total past due, disputes, DSO, etc.) and customizable reports can be easily and automatically shared with stakeholders.
- Gives customers self-service options: Customers can retrieve their invoices and account statements, send messages, or pay online via a user-friendly customer portal.
- Manages disputes: A streamlined collections and dispute management process ensures that disputes are resolved promptly, facilitating quicker collections and improved customer satisfaction.
As a result, an automated collections management system can help you reduce DSO, improve your team’s efficiency and effectiveness, protect your customer relationships, and free up your staff to focus on strategic customers and other higher-value work.
Plus, Esker’s Collections Management Solution syncs seamlessly with the rest of the Esker Order-to-Cash Suite that automates customer inquiries, order management, credit management, invoice delivery, payment processing, cash application and claims and deductions.
Check out this short, 7-minute demo of Esker Collections Management to see how it works.
You can also learn more by checking out our webinar: Building World-Class Credit & Collections Management with Automation.
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