HomeAccount ReceivableBest AR Practices to Improve Your Collections Strategy

Best AR Practices to Improve Your Collections Strategy

The right accounts receivable management indicates a significant impact on the revenue 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 from 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.
Timely customers in the customer segmentation matrix, which take up most of the percentile

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 collections process.

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

Delinquent customers in the customer segmentation matrix

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.

Doubtful customers in the customer segmentation matrix

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 behaviour, type, and size bring the best improvements in collection efficiency.

There are three optimization levers to improve collections:

  • Frequency of reminders
  • Channels of reminders
  • 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 actions.

SMB doubtful debt customers

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 communication, for example WhatsApp. This way, they can check the payment details sooner and make the payments faster.

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 prior to the invoice due date so that the customer would become aware and can make timely actions.

Activate WhatsApp for a better response rate

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 automated WhatsApp messages in the eBook below. 

Automated WhatsApp messages

We escalate much quicker by sending reminders 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

High manual reminders and calls to preserve customer relationships. 

Deeper connections need to be maintained for this segment of customers so more manual and humanized actions are necessary to be included in the collections process.

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.

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 collections 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

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. WhatsApp reminders can also be very effective due to their global popularity and easy access for all the customers.

Send reminders before the Promise to pay date via automatic email.

For delinquent customers, timely email reminders are very effective to create awareness about the invoice due date.

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.

Timely customers

Only automatic email reminders 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 get optimized and what needs to be eliminated.

One of the best AR practices is to use the right software that can help achieve your goals. If you’d like to streamline revenue collections, try out Peakflo. We help improve our customers’ Days Sales Outstanding by 12-15 days, and we certainly can help you too. Check out our savings calculator and see how much you can optimize with us.

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