Automating the collections process- Reducing working capital to accelerate growth

In recent years, the Working Capital Requirement (WCR) of companies appear to have stabilised throughout the world, despite an increase in Days Sales Outstanding (DSO) in 2017. In Australia, several studies1 have shown that while Days Working Capital (DWC) has slightly decreased in 2018, it has remained in line with the long-term trend that the number of days it takes to convert sales into cash has increased. By improving their billing and collections processes, companies can improve their Working Capital (WC) and, as a result, free up cash to finance their growth.

 

What are the current issues related to working capital management

To finance their need for WC, businesses can use bank loans and benefit from current interest rates that are near historic lows. Nevertheless, as banks are subject to financial ratios, they have no choice but to be more than cautious, limiting access to corporate credit, particularly for small medium businesses (SMBs)

The spread of interest rates on small business loans relative to the cash rate has remained persistently high since the 2008 global financial crisis. Additionally, by soliciting a loan to finance their WCR, companies are deteriorating their financial balance while at the same time limiting the borrowing capacity they need for their growth. In this context, the issue of financing the WCR remains crucial, especially given that in Australia, late payments are a recurring subject. A 2017 survey conducted by the Office of the Ombudsman found Australia to be a global laggard on payment times, with invoices paid on average 26.4 days late. In November 2018, the Australian small business and family enterprise ombudsman (ASBFEO) announced that it would conduct a new review of the payment behaviours and, in parallel, Prime Minister Scott Morrison announced that the Australian government will be “taking action to ensure small businesses are not being used as a bank.” The reality is that many companies continue to pay their invoices late because they are themselves being paid late by their customers. The lack of focus on improving collection processes compounds an uncontrolled increase in the WCR of these companies, which limits their available scope for growth and viability in the long run.

What actions can businesses perform to better control their WCR?

Improving WCR is a key issue that affects most departments within a company. It requires effective control of all economic processes, inventory management, supplier credits and customer payment/settlement periods, otherwise known as Days Sales Outstanding (DSO). It’s important to note that efforts to manage DSO cannot be strictly limited to the collections process. A customer who pays late is often an indicator of errors or inefficiencies in the order management process, goods or services delivery, billing, and the invoice delivery process. The ability to minimise DSO results from an efficient and seamless order-to-cash (O2C) process, which starts well before the invoice due date. 

When drafting the terms and conditions it is important to take into account factors such as Incoterms, title-retention clauses, payment terms and methods, as well as managing payment delays and late fees. Customer credit approval and monitoring are also very important in the O2C process. The role of the credit manager is also essential, as credit managers will assume the role of arbitrators to secure revenue while preserving customer relationships.

An invoice paid on time is also the result of good customer relationship and an effective error-free order management process. The coordination of all departments involved in the O2C process is key to ensuring consistency of process throughout the company.

Next comes the billing process. Billing in accordance with negotiated contractual terms is a prerequisite for effective accounts receivable (AR) management. Factors such as invoice delivery method (e.g., paper, email, via a portal, etc.), format (e.g., PDF, signed or not), sending frequency, reference to a specific order, invoice details by site or by business unit, etc., must correspond precisely to the expectations of each customer to ensure negotiated deadlines are met. The more a company follows the billing constraints required by its customers, the greater its chances of seeing its payment deadlines met. However, what may seem simple at first may be much more complex in terms of the different billing methods and regulatory requirements (e.g., paper, PDF signed, EDI, government platforms, web portals, etc.). The complexity is multiplied when the demands of hundreds, even thousands of customers must be taken into account.

That being said, business process automation solutions provide efficient customer order processing and support improved customer relationship. They enable customised and automated invoice generation to respond to formal customer requests and regulatory constraints with reduced labour activities.

 

Is debt collection the next step?

Once the invoice generation process has been revamped, the company must focus on its debt collection process, which requires collaboration between various departments. The collections process must be part of a company’s business strategy of improving its ability to control its cash generation. Efficient collections management requires planning and a systematic approach.

As previously mentioned, a late invoice is often a symptom of a weakness, whether it’s related to the goods or services themselves or to the ordering and/or billing process. The earlier these problems are identified, the quicker they can be corrected and their impact on invoice payment minimised. It is therefore crucial not to wait until payment is due to communicate with one’s customer and give them the possibility of raising an eventual problem. This task can be managed by different departments within the company (e.g., sales, technical or logistics teams, etc.). It is nonetheless good practice to capture the dissatisfaction of customers as part of the collections management process. The first step in the process comes even before the payment deadline in various forms (e.g., account statements, advanced reminders, pre-collection calls, etc.). Collections and customer relationship management are thereby linked for the benefit of all stakeholders.

 

In general, it is important to lookat a customer and its payment behaviour in order to adapt the collections process accordingly. For example, some customers may wait until they are reminded several times before paying. Additionally, payment behaviour may also depend on geography, industry sector, goods or services purchased, etc. The frequency and the timing must also be adjusted accordingly.

Finally, the management of a company’s DSO, especially for multi-nationals, is particularly challenging as it requires the standardisation of procedures and processes in all subsidiaries and high quality of inter-subsidiary communication. Credit managers confronted with these issues must understand not only the difficulties involved, but also the implications for the company’s financial performance.

Businesses must put in place appropriate means, in terms of both systems and processes, to accelerate the invoice to cash process while maintaining customer satisfaction. As part of this approach, centralised management and internal collaboration between different departments (e.g., credit managers, accountants, sales, etc.) and externally with customers is essential. However, this step is frequently neglected, with a surprisingly small number of companies making use of software solutions to manage their receivables.

 

An approach facilitated by the use of an automated collections management solution

Beyond a certain invoice volume, it becomes inefficient to rely on Excel or hand-written notes to manage the collections process. Implementing specialised software solutions can optimise the entire collections process.

An automated collections management solution requires businesses to document and evaluate their collections policies. It also encourages them to analyse their customer base to determine similar groups in terms of risk levels or specific characteristics (e.g., payment habits, credit risks, sales relationships, etc.). The definition of a granular communication and collections strategy is essential to meet the billing needs of customers.  An effective solution ensures that the defined strategy is followed without the risk of error, oversight, or overreliance on individual performance.

However, an effective collections management solution does not circumvent traditional AR teams. On the contrary, it capitalises on their skills and allows them to be more efficient and relevant in their work by removing low-value tasks. According to a recent study 30 percent of collections departments are devoted to managing and tracking activity. Automation will free up staff to focus on improving company cash flow. A dedicated collections management solution will also encourage collaboration between the different departments around a shared goal of reducing payment delays. It combines all necessary information and documents (e.g., invoices, orders, statements, collection notes, disputes, customer data, messages, etc.) in a CRM-like database that all stakeholders can access and share. Through custom task management, it’s possible to assign and track tasks involving different departments, offices or subsidiaries. It becomes the central collaboration system for all stakeholders in the collections process (e.g., sales, sales admin, finance, credit management, accounting, etc.).

A dedicated portal gives customers access to all their account information (e.g. invoices, credit notes, orders, etc.). The same portal also ensures that all communications with different departments and collections teams within the company are tracked. A customer can ask questions online, negotiate payment deadlines, and even pay before the due date if discounts on prepayment are appealing.

AFDCC, French Credit Managers Association

It’s also important to highlight that an automation solution provides a greater level of visibility into the collections process. It’s not always easy for credit managers or CFOs to have accurate data on the effectiveness of collections efforts: Are all reminders processed? Why are customers paying late? What is our dispute rate? This becomes even more complex in a global, multi-site or multi-subsidiary context. How does a company go about improving a process that is not measured? Centralising this function with a dedicated solution provides full visibility and allows a company to define the right actions to take. By gaining in productivity and efficiency, a collections department can focus on customer relationships rather than time-consuming low-value tasks.

The end result? Financial objectives are achieved, customer relationships improved and employees valued. Thanks to effective and powerful automation technology, collections departments can concentrate on customer satisfaction and improving productivity, making the department’s work more valued. A win-win situation for everyone.

  • Eric Maisonhaute
  • Director - Accounts Receivable Solutions
  • Esker Australia Pty Ltd
  • T: +61 2 8596 5126
  • E: eric.maisonhaute@esker.com.au
  • W: www.esker.com.au

 

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