Collections may not be every business owner’s favorite task however, maintaining an effective collection strategy is essential to running a successful business. Traditionally, collection departments focus on the clients with the most dated debt, as opposed to the clients with newly formed debt. This strategy may seem logical, but resourceful collection companies and departments should consider modifying this approach, and look at concentrating their efforts on customers that will provide the most productive collections.
The goal is to have collections employees work as analysts, as well as collections callers. By doing so, companies can improve collections and the bottom line.
Here are a few tips to help achieve optimal collections results.
Out with the old
One of the oldest, and perhaps most inefficient collections methods is prioritizing your call list based on the accounts receivable aging report. An aging report can be useful if used under the right circumstances, as it offers a snapshot of the overall health of a company’s customers. However, prioritizing your collections solely on an aging report is not recommended, as it assumes the most overdue invoices pose the most risk, which is not always the case considering customers with larger balances usually generate a larger risk.
Get the credit department onboard
A collaborative relationship between the credit and collections departments is essential to identify the risk of a customer. Ideally, your credit department should utilize an internal score system based on multiple factors when evaluating credit limits and approvals. Using an internal scoring system as opposed to relying solely on credit bureau scores can give the collections department better insight on a customer’s potential spending habits based on past transactions.
The credit department’s role should extend beyond determining initial credit and should include a regular review of existing customers. Customer reviews should be done during scheduled intervals depending on the nature of the account, balance and industry. Common reviews may include:
- Credit bureau scores
- Financial reports
- Original references to get updates on their pay history
- Personal visits to high-dollar customers
Once updated information is collected and reviewed, the credit department should reassess the customer’s internal score to determine if the maximum credit, payment terms or payment method appropriately match the customer’s associated risk. This information should be with the collections department so that they can adjust their approach accordingly.
Create customer segments
The key to prioritizing your collections is to segment your customers based on their financial history. Knowing a client’s financial history is a strong predictor of a company’s future financial standing. A better understanding of your customers’ financial history helps identify and prioritize which clients or customers it is best for collections to focus on.
In addition to analyzing a customer’s financial history, you will need to gather information on the:
- Size and age of the company
- Seasonal impact on the business
- Industry impact and trends
- Number of customers the company sells to
- Position in the supply chain
- Credit history
Gathering this data will allow collections employees to better prioritize and select the most effective methods for collecting outstanding debt.The better you know your customers, the better your collection efforts will be.
Put it all together
Organizing and analyzing a customer’s credit history can be overwhelming. However, the sophisticated software that is available today can help create in-depth analyses with ease!
Placing customer segments into a spreadsheet will allow the collections department to sort and prepare management reports, quickly and efficiently. The collections professionals can then easily analyze the different segments based on their inherent risk to determine a collections approach that will fit that particular segment.
Collections can take time, but it can be time well spent. If you put these practices to use, you will increase your collection results and keep bad debt to a minimum.