A Guide to Building an Effective Collections Strategy for AR Managers

Managing debt recovery can be a complex task for finance professionals and collections teams. It involves tracking digital transactions across various payment channels and assessing customer creditworthiness. Debt collection is about making sure you get the payments you’re owed. However, the process can be more complex – this is where the collections strategy comes into play.

There are many challenges in collecting overdue payments and accounts receivable managers need strong strategies to handle them. This discussion on collections strategy will offer practical tips and methods to help AR managers manage debt recovery effectively and maintain a solid financial approach.

What is a Collections Strategy?

A collection strategy in accounts receivable refers to the systematic plan and approach that a business or organization adopts to manage and recover outstanding debts from its customers or clients. The primary goal of a collection strategy is to ensure the timely payment of invoices and reduce the risk of bad debts. 

Why Is It Important for AR Managers to Build a Collections Strategy?

For an AR manager building a collection strategy is essential for maintaining financial stability, reducing risks, improving communication, and optimizing the overall efficiency of the accounts receivable department. It establishes a framework for proactive management and ensures that the organization can effectively navigate the complexities of the credit and collection process. 

Here are a few reasons to build an effective collection strategy.

Cash Flow Management: A well-designed collection strategy ensures that payments are received on time, helping maintain a steady and predictable cash flow for the business.

Reduced Bad Debt Risk: By proactively managing accounts receivable, an effective collection strategy helps minimize the risk of bad debts. It establishes clear procedures for identifying and addressing delinquent accounts promptly.

Customer Relationship Management: A collection strategy allows AR managers to strike a balance between collecting payments and maintaining positive relationships with customers. Clear communication and fair practices contribute to a more positive customer experience.

Standardized Processes: A collection strategy provides a framework for standardized processes and procedures, reducing the likelihood of errors, miscommunications, or oversights in the collection process.

Optimized Resource: AR managers can allocate resources more efficiently when they have a clear strategy in place. This includes knowing when to escalate collection efforts, negotiate payment terms, or involve legal action.

Performance Monitoring: A collection strategy establishes KPIs for evaluating the effectiveness of the AR department. This allows for ongoing assessment and improvement of collection processes.

What are the Challenges Faced in the Collections Process?

Before diving into collections strategy, it’s crucial to recognize the common issues collections teams face. Understanding these challenges helps AR managers find better ways to achieve financial success. Some key challenges include:

Handling a Large Volume of Delinquent Accounts

Collections teams often handle a high volume of delinquent accounts, which can make it hard to spend enough time on each account. This can cause delays in follow-ups and an increased risk of overdue payments.

Limited Time to Address All Accounts

Time constraints can prevent collectors from handling all accounts on their list. This can lead to missed chances for timely communication and solving payment problems.

Inconsistent and Outdated Data

If customer information or payment statuses are wrong or incomplete, collectors might waste time chasing payments that are already settled or misplaced. This can strain relationships with customers and increase DSO)

Inadequate Correspondence

While collection communication is important, ignoring key customers or skipping necessary customer interactions can be harmful. Collectors might miss chances to address the needs of customers who need more help, which can lead to delayed payments.

Improper Customer Prioritization

Relying solely on static parameters such as due dates, invoice values, and customer segments for prioritization may not be sufficient. Dynamic changes in the financial health of a company or a customer’s situation may not be adequately addressed, leading to ineffective prioritization.

To tackle these challenges, AR managers and their teams should regularly review and improve their collection methods. This means working on better data accuracy, improving communication, and using smarter ways to prioritize customers. Staying proactive is key to making the debt collection process more efficient and reducing bad debts.

How to Build an Effective Collections Strategy?

For AR managers to build a strong collections strategy, start by understanding your organization and its customers. Review the current process, spot problems, and assess how well existing methods work.

Talk to your collections team about what has worked for them. Use their insights to create a strategy that fits your business’s needs.

Set up clear communication, ensure customer data is accurate, and use technology to improve efficiency. Regularly check performance and make adjustments based on feedback to keep your approach effective and flexible.

Listed below are a few strategies you can implement:

1. Standardize Operations

To streamline operations in your organization, start by regularly reviewing your current processes. Look at how your collections team works. Some may send invoices in the first week of the month, while others may send them right after delivering a product or service.

Talk to each team member to find out which methods work best. Once you know the most effective strategies, try to standardize these practices across the entire accounts receivable team.

2. Segment and Prioritize Accounts

Use a clear system to prioritize overdue accounts based on how late they are, the amount owed, and customer risk. By grouping accounts this way, you can focus on high-risk ones, making the collection process more targeted and effective.

According to McKinsey & Company, companies should categorize accounts into 4 segments – burdensome, angelic, caring, and dire. Here’s how the segmentation looks:

3. Incorporate Automation for Time Management

Use automated tools and software to simplify routine tasks and communications. Automation can save time by reducing manual work, allowing collections teams to manage more overdue accounts more effectively within the same amount of time.

4. Regular Data Audits and Updates

Regularly review customer data to find any errors or missing details. Keep all customer information in one central place. Set clear rules for updating customer data to keep it accurate. Use data analytics to spot patterns, understand customer risk, and make better decisions. Keeping data up-to-date prevents duplicate work and improves debt collection strategies.

5. Clarity in Payment Terms and Policies

Keep your payment terms clear and easy to understand. Clearly communicate expectations and deadlines to avoid confusion and ensure a smoother collection process. Be upfront about any late fees and penalties to encourage timely payments.

6. Adaptable Payment Plans

Offer flexible payment plans, especially when customers face financial difficulties. Understand that some may have temporary challenges. By being flexible with payment terms and allowing partial payments, you show you’re willing to work together. Focus on keeping customer loyalty rather than just one sale.

7. Diversified Payment Options

Provide diverse payment options to simplify the payment process for customers. Invoices should be easily payable, and a self-service portal with secure payment options, such as credit cards, ACH transfers, wire transfers, or digital wallets, can expedite payments and enhance the overall customer experience.

8. Personalized Reminder Communications

Customize reminder and follow-up emails to make them more personal. Tailor each message to the customer’s specific situation to show that you understand their needs and want to work together to resolve payment issues. Personalized communication helps build good relationships.

9. Incentives for Timely Payments

Offer incentives like discounts, rewards, or extended credit terms for early or on-time payments. These motivators encourage quick payment and help build stronger customer relationships.

10. Evaluate Performance

Regularly review and improve collection processes using performance data and feedback. This helps keep strategies effective and responsive to changes in customer behavior or the economy.

A Way Forward

Accounts receivable managers often struggle to handle many collection tasks. Manual processes take a lot of time and are prone to mistakes. Keeping track of multiple customers, outstanding payments, due dates, and accounts needing attention can be challenging.

Automation tools provide accuracy and efficiency that manual methods cannot match. They help send timely reminders to customers, reduce missed deadlines, and offer real-time payment tracking for quick dispute resolution. Automation also simplifies workflows, lowers the risk of costly errors, and ensures an organized approach to collecting bad debts. As transaction volumes grow and the need for quick responses increases, automation is becoming the standard, making AR managers more effective.

With Peakflo’s Collections Task Management, AR managers can work smarter and more effectively. Our solution provides:

• Customizable roles-based access and permissions.
• Empower different teams to work together

• Design and trigger actions for team members to execute.
• Create reminder templates that automatically fill in the information, saving valuable time for your team that’s spent on manual data entry.

• Seamless collaboration among the collection, finance, and sales teams.
• Tracking of all messages received/sent to the customer, payment history, and collaboration with teammates through the customer timeline.

• Reassign customers to different collection workflows based on Peakflo’s AI-powered payment behavior report.
• Check the last customer activity details and date from the report to better gauge the next steps

• Get a week-over-week analysis of collections health and an overview of the sales and finance team’s pending actions.

• Track collections KPIs through the “Team Activity Report” to understand each team member’s collections and overdue amounts, monitoring pending or completed actions.

Check out Peakflo’s Accounts Receivable solution to accelerate payment recovery and reduce DSO.

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