Best AR Practices to Improve Your Collection Strategy

The right accounts receivable management indicates a significant impact on the collection and cash flow of your business. A strong and well-implemented Accounts Receivable strategy can mean timely payments, happy client relationships, and high liquidity in the business.

According to a survey by Quickbooks, poor accounts receivable management could lead to a business owed $300,000 in late payments. Also, it can waste staff time and make them less productive, prevent growth, and overall, create poor cash flow for the business.

Based on our experience working with millions of bills every month, there are a few steps that have been proven for actual companies to improve their AR management.

1. Segment your customers

The first segment – timely customers

This segment should cover all the customers that pay you in less than half of your overall days sales outstanding or pay you on time.

The second segment – delinquent customers

Delinquent customers are the segment that takes 50% to 75% of your total DSO to make payments. But you can go one step further and also break this segment down based on the size of the business of your customer.

We recommend you break down the segment into SMB delinquent customers and large delinquent customers. Why should I create a segment based on the customer company you ask? Because they require different reminders and actions to speed up the collection process.

Large delinquent customers bring in higher revenue compared to SMB delinquent customers.

The third segment – doubtful debt customers

This segment will be your late payers that also create doubtful debt for your company For this segment, we also recommend the same breakdown as the delinquent customers, SME Doubtful debt customers and large doubtful debt customers.

2. Send the right reminder at the right time from the right channel 

Before setting up smart automated reminders here are a few points that you should keep in mind for all your customers.

Activate all customers 

All customers should be put on active workflows to receive automated and manual reminders. Automated workflows not only save time but also improve collection efficiency

Tailor workflows

Tailor workflows according to customer payment behavior, type, and size bring the best improvements in collection efficiency.

There are three optimization levers to improve collections:

• Frequency of reminders
• Channels of reminders
• Collection Calls
• Escalations

3. Actions to take for each customer segment

Now that you have all the customer segments prepared, it’s time to implement the right courses of action.

SMB doubtful debt customers

1. Create an aggressive workflow with a very high frequency of reminders (roughly every 2-3 days).
Your SMB doubtful debt customer segment should start receiving customized payment reminder templates through their preferred channel of communication, for example, WhatsApp. This way, they can check the payment details sooner and make the payments faster.

2. A P2P (plan to pay or promise to pay) reminder should be sent before the invoice is due via automatic email.
Start sending reminders 7 days before the invoice due date so that the customer becomes aware and can take timely action.

3. Activate multi-channel reminders for a better response rate.
Implementing multi-channel reminders can significantly improve your chances of collecting payments. Communicating with customers via a combination of email, SMS, and WhatsApp gives you the edge to reach them on the right platform. For example, WhatsApp is one of the most popular messaging apps all over the world. You can automate WhatsApp messages to make it easier for your customers to pay you whenever and wherever!

Find out the best practices on how to reach customers through multi-channel payment reminders in the eBook below. 

4. We escalate much quicker to the senior management of customers.
It’s important to send the reminders to the right contact point in this segment, if the reminders get sent to the wrong person, the collections process will obviously take longer to complete.

Large doubtful debt customers

1. High manual reminders and calls to preserve customer relationships. 
Deeper connections need to be maintained for this segment of customers so more dunning emails and humanized actions are necessary to be included in the collection process.

2. The promise to pay date should be set up before the invoice is due via manual call.
No need to wait until the promise to pay date to execute the first step of the workflow reminder.

For large doubtful debt customers, it’s best to take timely actions before the promise to pay date to ensure they are aware of the invoice(s) due date in advance.

3. Offer flexible payment options to the customers.
Offer various payment options such as credit cards, bank transfers, and online payment platforms. Allow customers to set up payment plans if they are struggling to pay the full amount at once.

4. Escalating to the senior management of customers should be done much later.
For this segment of customers, reaching out to senior management could wait for later stages of the collection process. It’s not easy or at times such a good idea to send reminders to the people who are likely not involved in the day-to-day activities of the company.

Delinquent customers

1. Frequent automatic emails and manual calls should be combined with WhatsApp messages.
For this segment of customers, both manual and automated workflows are needed to make the collections process faster. A collection call can serve as a valuable medium for collectors when communicating with delinquent customers. WhatsApp reminders can also be very effective due to their global popularity and easy access for all customers.

2. Send reminders before the Promise to Pay date via automatic email.
For delinquent customers, timely email reminders are very effective in creating awareness about the invoice due date.

3. Offer incentives to collect payment on time. 
Offer discounts to the customers if pay their invoices early. Implement and communicate late payment fees to encourage timely payments.

4. We escalate much quicker to the senior management of customers and increase the frequency of reminders to improve collection efficiency.
It’s important to send the reminders to the right contact point in this segment, if the reminders get sent to the wrong person, the collections process will obviously take longer to complete.

5. Hire a collection agency or take legal action.
If internal efforts fail, consider hiring a collection agency to recover outstanding debts. As a last resort, take legal action to recover the debt.

Timely customers

Only automatic email reminders in low frequency are needed because customers already have a timely payment behavior.

4. Check your DSO and monitor the changes

Now it’s time to check your DSO for your customer segments and see if there are any improvements. Of course, you can test and add a few other reminders for your customers based on the results that you get. Monitoring the results month-over-month after checking the DSO report will give you a better idea of what needs to be optimized and what needs to be eliminated.

Closing Thoughts

Implementing the best accounts receivable practices is crucial for improving your collections strategy and maintaining a healthy cash flow. By leveraging automated systems, setting clear payment terms, and utilizing multi-channel communication, you can enhance the efficiency of your collections process. Regularly monitoring KPIs and maintaining strong customer relationships will also play a significant role in reducing overdue payments and minimizing financial risk.

Use the right software that can help achieve your goals. If you’d like to streamline payment collections, try out Peakflo. With Peakflo’s Automated Collection Management Solution, you can take your AR processes to the next level. Peakflo offers automated invoicing, smart reminders, and an easy-to-use customer portal, ensuring timely payments and reducing manual effort. We helped our customers to improve Days Sales Outstanding by 12-15 days, and we certainly can help you too. Enhance your collections strategy and improve your cash flow with Peakflo’s innovative tools. Check out our savings calculator and see how much you can optimize with us.

FAQ

What is KPI in accounts receivable?
A KPI in accounts receivable measures the effectiveness and efficiency of the receivables process. Common KPIs include Days Sales Outstanding (DSO), Collection Effectiveness Index (CEI), and aging of receivables.

How can I improve my receivables collection?
Improve receivables collection by implementing automated invoicing and reminders, offering multiple payment options, setting clear payment terms, and regularly following up with delinquent customers.

How can collection strategies be improved?
Collection strategies can be improved by using a multi-channel approach for reminders, personalizing communication, offering incentives for early payment, and maintaining strong customer relationships.

What is the AR role in the collections process?
The AR role in the collections process involves tracking outstanding invoices, sending reminders, managing customer payments, and working to resolve any issues preventing payment.

What are the five steps to managing accounts receivable?
The five steps to managing accounts receivable are:
1. Credit Approval: Assess and approve customer creditworthiness.
2. Invoicing: Generate and send accurate invoices promptly.
3. Monitoring: Track outstanding receivables and monitor payment due dates.
4. Collections: Follow up on overdue invoices with reminders and collection efforts.
5. Reconciliation: Reconcile accounts to ensure payments are correctly applied.