HomeAccount ReceivableA Guide to Building an Effective Collections Strategy for AR Managers

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 along the way, and accounts receivable managers must have effective strategies in place. This discussion on collections strategies aims to provide AR managers with practical insights and effective methods to handle the complexities of debt recovery, ensuring a proactive and robust 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.

KPI finance


What are the Challenges Faced in the Collections Process?

Before we explore solutions, it’s important to understand the common problems faced by collections teams. By identifying these challenges, AR managers can better navigate the path to financial success. Some major challenges include:

Handling a Large Volume of Delinquent Accounts

Collections teams often deal with a high volume of delinquent accounts, making it challenging to allocate sufficient time and resources to each account. This can lead to follow-up delays and an increased risk of overdue payments.

Limited Time to Address All Accounts

Time constraints can hinder the ability of collectors to address all accounts in their worklists. This limitation may result in missed opportunities for timely communication and resolution of payment issues.

Inconsistent and Outdated Data

Incomplete or inaccurate information about customers and their payment status can lead to redundant efforts. Collectors may waste time attempting to collect payments that have already been settled or improperly allocated, causing strained customer relationships and an increase in DSO.

Inadequate Correspondence

While collections correspondence is essential, focusing on non-critical customers or neglecting the groundwork of customer collaboration can have adverse effects. Collectors may miss the opportunity to address the needs of customers who require more attention, leading 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 address these challenges, AR managers along with their teams need to regularly assess and refine their collection processes. This includes implementing strategies to improve data accuracy, enhancing correspondence methods, and adopting more dynamic customer prioritization approaches. It’s essential to stay proactive in addressing these challenges to optimize the debt collection process and reduce bad debts.

How to Build an Effective Collections Strategy?

For AR managers aiming to build an effective collections strategy, it is essential to start by thoroughly understanding the unique dynamics of your organization and its customer base. Begin by assessing the current collections process, identifying pain points, and evaluating the effectiveness of existing approaches.

Engage with your collections team to gather insights on successful strategies they have employed. With this information, tailor a strategy that aligns with the specific needs and challenges of your business. 

Implement clear and concise communication protocols, ensure accuracy in customer data, and leverage technology to enhance efficiency. Regularly evaluate and adjust the strategy based on performance metrics and feedback, fostering a dynamic and responsive collections approach.

Listed below are a few strategies you can implement:

Standardize Operations

To streamline operations across your organization, begin by examining existing processes. Identify the current practices of your collections team. For instance, some may prefer sending invoices in the first week of the month, while others may opt for immediate invoicing upon product or service delivery. Engage with each representative to determine the most successful strategies. Once you identify the most effective collection approaches, aim to standardize these practices throughout the entire accounts receivable department.

Segment and PrioritizeAccounts

Implement a systematic approach to prioritize delinquent accounts based on factors like age, amount owed, and customer risk. Segmentation allows you to focus resources on high-priority accounts, ensuring a more targeted and effective collections process.

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

Effective Collections Strategy
Image referred from McKinsey&Company

Incorporate Automation for Time Management

Integrate automated tools and software to streamline routine tasks and communications. Automation can significantly reduce manual efforts, allowing collections teams to allocate time more efficiently and address a larger volume of delinquent accounts within existing time constraints.

Regular Data Audits and Updates

Conduct regular audits of customer data to identify inconsistencies and inaccuracies. Have a centralized database of all customer information and related details. Establish a protocol for updating customer information to ensure data reliability. Leverage data analytics to identify trends, assess customer risk, and make informed decisions. Consistent data maintenance helps in avoiding redundant efforts and enhances the overall effectiveness of debt collection strategies.

Clarity in Payment Terms and Policies

Ensure your payment terms are straightforward and easily comprehensible. Communicate expectations and payment timelines to prevent misunderstandings, establishing a solid foundation for a smoother collections process. Transparently outline late fees and penalties to encourage timely payments.

Adaptable Payment Plans

Offer flexible payment plans, especially in challenging financial situations. Recognize that some customers may face temporary hardships, and by being flexible with payment terms and allowing partial payments, you demonstrate a willingness to collaborate. Prioritize maintaining customer loyalty over a single transaction.

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.

Personalized Reminder Communications

Customize reminder messages and follow-up emails to add a personal touch. Tailor communications to each customer’s situation, demonstrating recognition of their unique circumstances and a commitment to working together to resolve payment issues. Personalized communication can contribute significantly to nurturing goodwill.

generating a payment reminder using accounts receivable software


Incentives for Timely Payments

Consider providing incentives for early payments or timely settlements. Discounts, rewards, or extended credit terms can serve as attractive motivators for customers to settle their debts faster. Offering such incentives not only encourages prompt payments but also strengthens the positive relationship with customers.

Evaluate Performance

Regularly evaluate and refine collection processes based on performance metrics and feedback. Continuous improvement ensures that strategies remain effective and adapt to changes in customer behavior or economic conditions.

A Way Forward

Accounts receivable managers often face challenges in handling a large number of collections activities. Manual processes are not only time-consuming but also prone to errors. Managing multiple customers, and keeping track of outstanding amounts, due dates, and accounts requiring attention can become complex.

Automation tools offer precision and efficiency that manual methods lack. They ensure timely customer reminders, reduce missed deadlines, and provide real-time payment tracking for quick dispute resolution. Automation also streamlines workflows, minimizing the risk of costly errors and ensuring a systematic approach to bad debt collection. As transaction volumes increase and the demand for faster responses grows, automation is becoming standard, empowering AR managers.

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
finance crm
  • 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.
reminder collections strategy
  • 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.
audit trail
  • 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
collections strategy to track customer status
  • Get a week-over-week analysis of collections health and an overview of sales and finance team pending actions.
weekly collections report
  • Track collections KPIs through the “Team Activity Report” to understand each team member’s collections and overdue amounts, monitoring pending or completed actions.
collections team activity report

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