Learn how to make more effective accounts receivable collection calls
Knowing how to approach collection calling will increase your chances of success and put your mind at ease as you dial.
AR collections are necessary for any enterprise. But challenges arise in maintaining an efficient and effective collections process, particularly for businesses relying on outmoded methods.
Collections is an area that's primed for digitization—and perhaps more importantly, transformation.
Learn why the most important change you can make right now to increase your collections’ effectiveness is to automate and embrace collaboration.
Cash flow for a company is akin to the human circulatory system; it keeps the entire operation functioning. After all, it was Sir Richard Branson who said, “Never take your eyes off the cash flow because it’s the lifeblood of business.”
Accounts receivable collections is the process a business carries out to ensure that customers follow through on payments for services or products they’ve bought on credit. It’s a key part of converting credit to cash and plays a pivotal role in sustaining cash flow, as it pursues timely payments.
In most cases, when a debt is unpaid for 30 to 90 days past its due date, your accounts receivable team will start attempting to collect the payment. According to a recent report by Dun & Bradstreet and the Credit Research Foundation, some industries experience up to 60% of accounts being more than 90 days overdue. This puts a lot of workload (and stress) on the accounts receivable collections teams.
But: As important as AR collections are to your organization, manual processes or other outmoded approaches can hamstring your company’s ability to promptly receive payment. Unfortunately, these are all too common with traditional AR collections processes.
What makes up a traditional accounts receivable process
The issues that plague traditional AR processes
The impacts those issues can have on a business
How you can measure your AR performance
Ways of improving your traditional AR process
What comprises accounts receivable collections automation software
How automation streamlines AR collections
Ways to choose the best AR collections automation solution
It’s the job of your AR department to ensure payments get received in a timely manner. Typically, a traditional, manual accounts receivable collections process is tedious in the extreme, not to mention highly labor-intensive.
Many follow a traditional dunning process in pursuit of payment, too, instead of employing advanced tactics and automation. The process tends to kick off when your AR team pulls a list of delinquent accounts. These accounts are sorted by priority and then distributed to team members, who then must reach out to each customer.
Usually, when a debt creeps beyond its Net payment terms, your AR collections team starts making collection calls in an attempt to resolve the outstanding payment. This work is often piled on top of other AR team tasks, of which there are already too many. It’s a luxury (if that’s the word) for an accounts receivable department to have a collections specialist on staff who’s exclusively dedicated to these types of tasks, meaning other—often more strategic—initiatives are shelved or suffer.
Since collections work has to coexist with all other AR team tasks, many delinquent accounts don’t get as much attention as they should because AR collection efforts get prioritized around bigger invoices or accounts.
Here are the steps that make up a traditional dunning process:
Your AR collections team runs an AR aging report to list open invoices, their balances, and how long they’ve been outstanding. The report can cover any period from the date the invoice was due up until 30 days after its due date and may filter for delinquent accounts beyond 30 days and include all accounts past-due within 30-60 days, 60-90 days, and those beyond 90 days.
The AR aging report is the basis for setting up a repository of delinquent accounts. This repository may be “triaged” to prioritize who gets contacted first, or most often, on the basis of how late they are or how much is outstanding, etc.
Sometimes an AR team may focus on making calls to a customer to urge payment. Sending written notices may not happen until later in the process or they may be sent at the very start. This is where a series of dunning letters or collections emails are employed. To save time, they’re drafted using pre-built templates; here are two examples.
Before a dunning letter gets sent, your AR team likely must review it with a manager or other senior member of the department. Then the letters need to be reviewed against your repository of customer emails and postal addresses to verify they’re correctly addressed. Then they’re sent, either by sending them as postal letters or by emailing each customer.
After this, you should start receiving payments on overdue invoices. You'll have a better chance of retrieving those payments if you followed a clear process and communicated the right information to your customers. While some may pay you after receiving a dunning letter, others may dispute the charges, while others will still ignore the dunning notice.
Despite all the effort involved, the traditional AR collection process—to no one’s surprise—may still fail to resolve outstanding debts. One study found that 65% of mid-sized businesses spend an average of 14 hours per week carrying out admin tasks related to collecting payments. Yet after all that work, most companies are forced to write off around 1.5% of their outstanding receivables as bad debt or sell it off to a third-party collections agency once it reaches the 120-day past-due mark.
Another irony of the traditional AR collections process? The manual recordkeeping necessary to keep track of who’s been contacted and received calls or dunning letters, and where they are in the process.
There are issues that are nearly inescapable when you’re relying on a traditional, mainly manual process for collecting on invoices, one that depends on snail mail, email, cautionary phone calls or other outmoded methods. These issues include:
Human error
One-way communication
Invoicing delays
Sloooow payments
Higher costs
The more manual steps in a process, the greater the risk of errors occurring. Human error is the biggest cause of invoice disputes, accounting (excuse the pun!) for 50% of them. Why would a buyer pay an invoice they view as inaccurate? So the more errors that occur, the more disputes they’ll cause with more customers, and the longer it will take for you to collect cash.
The disconnect that’s caused by the communication gap between a company's AR department and its customers can exacerbate AR collection process problems. The traditional AR collections process is built around one-way communication, as the seller (that’s you) typically tells the customer what to pay and then proceeds to badger them with emails or calls when they don’t.
The ensuing back-and-forth can be frustrating for you and your customers and may further delay payment. No wonder, then, that 82% of executives recently told us their organization has lost work due to payment process miscommunication.
According to one of our recent studies carried out in partnership with Wakefield Research, 27% of invoices, on average, are delayed due to internal or external communication lapses that can arise because of manual processes where invoices don’t get sent out in a timely manner, reminders aren’t sent, and so on.
This only compounds the overall problem faced by AR teams: Catching up with tasks like invoicing and collections is a Sisyphean job for mid- to upper-midsized companies, as you can see from the chart below.
All of the above results in slowdowns in payment and this is going to impact cash flow by driving up your days sales outstanding (DSO). We’ll explore this in greater detail later on.
A company relying on manual invoicing and collections methods is misspending its money: In these cases, 27% of AR teams are devoting 50% (or more!) of their time trying to resolve invoice disputes. More than just costly for the company, it distracts them from more strategic collection activities.
“In terms of business impact, the effect of delayed collections is simple—cash flow is decelerated, making it more difficult for your company to perform the impactful work it has set out to do. Manual processes are a massive driver of failures to pursue collections, as AR teams are occupied by more tedious work rather than focusing on delivering superior customer services which will in turn boost collections.” — Adam Dyrda, Product Manager, Versapay
Knowing how to approach collection calling will increase your chances of success and put your mind at ease as you dial.
Relying on an AR collections process like the one we’ve just outlined can actually harm your business. Here’s how:
It reduces your cash flow
It’s inefficient and disengages your employees
It damages your customers’ experiences
A study by PYMNTS.com and American Express revealed how firms using manual processes to follow up on overdue payments took 67% longer to collect than those employing automated AR tools. Forty-nine percent said manual processes were one of the three most problematic aspects of AR management.
A recent study we ran in partnership with Wakefield Research further emphasizes the impact manual processes have on collections. It found that upper mid-sized companies lose $4.5 million every month due to poor invoicing processes.
Managing a traditional AR collections process can seriously devour an AR team’s time, energy and morale, negatively affecting staff engagement and retention. Plus, the inefficient manual processing of invoices, chasing payments, and dealing with errors and issues drive up labor costs.
It’s no surprise that 92% of C-level respondents to the Wakefield survey strongly agree that digitizing AR is vital to achieving their organization’s peak performance.
Constantly re-contacting a customer to urge them to pay their bills is not a recipe for a healthy, long-lasting relationship. Dunning letters, for example, are impersonal and usually sent by email or snail mail, which doesn’t give B2B buyers the flexible payment options they prefer—options they’re used to enjoying in their everyday lives as consumers.
This also puts AR teams in a reactive position. Waiting, post-invoice, to communicate with customers only when payment is overdue doesn’t foster a positive, cooperative relationship that recoups payments more rapidly.
Research by Versapay and Gartner Peer Community found that just 4% of company leaders felt that finance/procurement had a great positive impact on customer experience. So a poor customer experience with your AR collections process can be deadly, and executives know it:
73% admit that the invoice-to-cash cycle is a frequent source of negative customer experiences, and
49% say their customers are somewhat or very frustrated with their collections experience
Effectively managing delinquent accounts is key for thriving accounts receivable teams. Learn 3 useful methods for identifying delinquent accounts and 7 steps for decreasing them.
Unfortunately, delinquent payments have a time limit: The longer an invoice goes unpaid, the less likely it is you’ll see your money.
Here, then, are a set of best practices to put in place to help you improve your collections efforts, even when you’re using a traditional AR collections process. While these practices won’t see your AR collections radically overhauled (more on that below), they will ensure your existing approach is increasingly optimized:
Review customer credit ratings
Grade your customers
Invoice customers promptly
Be clear about terms and due dates
Offer multiple payment options
Know your customers’ approval process
Send reminders before due dates
Improve your approach to AR collections calls
Use an aging method to track uncollected receivables
To evaluate creditworthiness, pull customers’ credit ratings from a credit-monitoring firm like NACM, Dun and Bradstreet, Experian, or Equifax. The NACM National Trade Credit Report is one of the oldest and largest credit-monitoring firms, offering an on-demand predictive score and risk rating.
Once you’ve had experience with your customers, you’re in a position to assign your own rating system to them. This can be as simple as grading them from A to E: An A-grade customer always pays promptly, requiring minimal collection efforts, whereas an E-grade customer is cash on delivery (COD) only, always prepaid.
See our point earlier about how a large number of invoices somehow get delayed; you’ve got to send out invoices daily as soon as a customer receives the product or service. Avoid the mistake of batch-sending all invoices on a certain day of the week, because that only adds more days to the collections cycle.
Don’t give anyone the excuse of, “I couldn’t find the due date on your invoice.” Be loud and proud: Have the terms and due dates boldly displayed. Hint: If a customer consistently pays late by a specific number of days, talk with their accounts payable department to see what terms are on file. They may have you as a Net 60 instead of a Net 30, for instance.
Here’s a great example of what an invoice should look like:
In an electronic age, many customers want flexibility in how they pay an invoice. Give them that by providing several B2B payment options, which helps them manage their own cash flow while still helping you get paid. Having other payment choices—beyond checks—available improves the customer’s experience—and your odds of prompt payment.
When you’re familiar with a customer’s approval process and with the personnel who are part of it, you may understand where approvals get bottlenecked and who to copy on your next reminder message. For instance, when an invoice gets hung up in AP, it may make sense to include the manager whose team is using your product or service, as they may want you to be getting paid consistently if you’re doing a good job.
About a week before the invoice is due, send your customer a friendly reminder that the due date is coming up. In a hectic AP department, this can help you stand out, especially if the tone is helpful and expresses gratitude for the work. Be sure to attach a copy of the invoice and a contact person the customer can approach in case of disputes or discrepancies.
💡 Payment reminders offer a unique opportunity to collect cash efficiently and prevent future delayed payments. Here are 4 payment reminder tips that will boost cash flow and accelerate collections.
There’s a certain art to a good AR collections call. It starts with having the right information in front of you, not defaulting to a confrontational tone but being cooperative and validating a customer’s point of view. You can use conversational strategies like open-ended questions that get them to be more forthcoming, and planning how you’ll navigate past excuses like, “the check got sent,” “there’s a problem with the invoice” or others.
This accounting method calculates your monthly projected sales and then decreases the anticipated revenue by the percentage of uncollected sales. There are different aging schedules for different industries, but it’s important to have one in hand that’s right for your company. It’s vital to spend time developing and implementing standards, policies, and procedures like this that will help your team in collecting payments promptly.
💡 Accounts receivable aging reports are one of the most powerful tools in your AR team’s toolkit. Learn why they’re so valuable.
Encourage early payments by offering discounts or incentives to customers, as this can motivate them to settle their invoices sooner.
Keep detailed records of all interactions and payment agreements. This documentation can serve as evidence if disputes arise and helps in tracking progress.
Develop clear and consistent collections policies and communicate them to your team, and ensure everyone involved in collections follows them.
Train up your collections team to enhance negotiation and communication skills, because that’ll help them resolve payment issues more effectively.
The best way to improve your AR collections process is by moving from a manual to automated process by following these steps:
By using certain key performance indicators (KPIs), you can gain insights into how well your particular accounts receivable collections process is working. Here are the KPIs that are most relevant to that.
AR turnover ratio
Expected cash collections
Average collection period
Days sales outstanding
Collection effectiveness index
Average days delinquent
Number of revised invoices
Staff productivity
The number of times during a given period the company collected the average value of its receivables. Your AR turnover ratio gives you quick insight into whether you’re extending credit to the right customers, and whether your collections team is doing a good job at pursuing overdue receivables.
Learn more about accounts receivable turnover ratio →
What’s the amount of cash your company can expect to have at a given time? Two revenue sources contribute to this: cash sales and collections on accounts receivable. Calculating it can help you better understand your current cash position and take early action if you project you’ll be short on cash.
Learn more about expected cash collections →
The number of days it takes your business on average to get paid after making a sale or delivering a service. Also known as days sales outstanding (DSO). This KPI can help you understand the current state of your cash flow; if your average collection period is higher than you’d like, this may signal challenges in unlocking working capital.
Learn more about average collection period →
The average number of days it takes for a company to get paid after making a sale on credit (also known as average collection period or days receivables). Knowing how long it takes your company (on average) to receive payment helps you understand the status of your cash flow, customer creditworthiness, and general customer satisfaction.
Learn more about days sales outstanding →
The percentage of receivables a company has collected during a given period. CEI offers a different perspective for assessing collections efforts than DSO or average collection period. DSO is a measurement of time (how receivables are collected) while CEI measures quality (the proportion of your receivables that are collectible).
Learn more about collection effectiveness index →
The average number of days invoices are delinquent or past-due. Knowing ADD can provide additional insight that DSO alone won’t supply. Credit and collections teams often simultaneously evaluate DSO, best possible DSO (BPDSO), and ADD to understand how quickly they’re converting invoices into cash.
Learn more about average days delinquent →
The total number of invoices your AR team has had to revise over a specific period. Each invoice revision can take substantial effort because your AR team must investigate the cause of the dispute and evaluate whether you’ll provide a price reduction. If your number of revised invoices is high, it might indicate broader invoicing problems—like frequent errors from manual data entry.
Learn more about number of revised invoices →
The units of output you get (invoices sent, payments collected, payments applied to invoices) respective to units of input (labor, capital and material). Higher staff productivity equates to lower DSO, fewer billing and invoicing errors, more time available for more strategic work and lower employee turnover rates.
Learn more about staff productivity →
—
🎥 For proven strategies on optimizing accounts receivable performance, and to unleash to full potential of your AR, watch this on-demand webinar, led by Versapay’s CFO, Russell Lester.
To improve your AR collections process and boost its performance, you can take certain measures to reduce manual labor and accelerate cash flow. Remember, though, that there’s a ceiling on how far you can improve any manual process. For maximum improvement, you’ll want to embrace automation (more on that below):
Take a long, hard look at your existing accounts receivable collections process. Don’t be afraid to set benchmarks based on what you know about industry best practices (or even how your competitors do it) and determine where there’s room for improvement.
If you’re relying on an entrenched, manual-intensive AR collections process, you can still squeeze some greater efficiencies and successes out of it by following the best practices—large and small—we detailed above. What’s important is to make sure they’re embedded in the process and that everyone who is trained in that process understands they’re mandatory.
Establish lines of two-way communication with customers to ensure they understand payment terms and expectations. Address any concerns promptly to maintain a positive relationship.
Have your AR team tailor its collection approach to individual customers. Understanding their unique financial situations and being flexible when working with them to address payment can work wonders.
Accepting electronic invoices will slash your processing time and costs and make invoices far more trackable, as you’ll know if they’ve been viewed. Ultimately, it’s much more convenient for the customer, as it spares them similar processing headaches (and potential paper cuts).
Collections have undergone a powerful transformation thanks to the introduction of automation. This has been a leap forward for accounts receivable since it reduces the amount of resources expended on collections while simultaneously accelerating cash flow and boosting CX.
What are the ways in which accounts receivable collections automation software enhances and accelerates the collections cycle? Glad you asked:
Companies that still rely on manual accounts receivable collections workflows encounter a range of difficulties that businesses with automated systems do not. These difficulties can have a ripple effect on the whole collections process—and therefore on the entire enterprise.
Automating your manual accounts receivable processes will deliver tremendous benefits across billing, payments, collections, reporting, and more.
An AR collections software solution can make the collections process far more efficient and effective. It also can provide your enterprise with new data analysis capabilities that uncover new insights—and opportunities—for improving cash flow and customer relationships. Here’s how:
An AR collections software solution gives your AR team the ability to automatically target customers with reminders before they become delinquent.
By providing the capability for two-way real-time communication with customers, it allows your AR staff to manage disputes and answer questions as they arise and preemptively mitigate disputes.
By automating notifications, it lets your team receive and deliver timely prompts to keep them on task and focused on collections priorities.
It provides centralized, continuously updated, top-down visibility into all customer interactions.
By delivering valuable, actionable insights into which customers require immediate attention and intervention from staff, while the software handles lower-priority collection tasks.
It supplies your AR team with a central, single source of truth for everything related to your customers’ open accounts receivable and helps them better oversee the effectiveness of collections efforts.
Efficiency gains result from automating the repetitive drudgework involved in collections, as those tasks are executed much more quickly and flawlessly.
Reductions in DSO are realized now that there’s a better process in place that includes prompt and accurate invoicing, error elimination, multiple customer payment options, automated reminders and notifications and more.
Accelerated cash flow results from accelerating the collection of outstanding receivables, allowing your company to better meet financial obligations.
Improved customer experience makes them more likely to pay promptly and stay customers.
Discover the benefits of automating B2B collections and learn 8 efficient ways to automate your collections process for faster, higher-quality results.
A good AR collections software solution will digitize smaller, time-consuming tasks, liberating your staff to do what they ought to be doing: Solving customer issues and collecting payments. A good AR collections platform will help them with these, via electronic invoicing, digital payment acceptance, collaborative dispute management and more. This results in an accounts receivable collections process that scales easily by empowering collectors to build great customer relationships and personalize their outreach.
What are some of the key capabilities you’ll gain from an AR collections software solution?
Zero-touch collection
Real-time communications and dispute management
Timely notifications
Detailed reporting and customer management
Ability to guide and prioritize collector activities
Clean audit trails
Avoid having to reactively nudge your customers by having features that let you target them before they become delinquent.
You should be able to chat with your customers in real-time over the cloud and manage disputes as soon as they arise.
Receive notifications and other timely prompts to stay on task and focus on your collections priorities.
Have a centralized single source of truth for everything related to customers’ open AR and better understand the effectiveness of your collections efforts.
Gain valuable, actionable insights into which customers require immediate attention and intervention, and let the software handle the rest.
Efficient collections begin and end with centralized visibility of all customer interactions and a record of all team activities. A shared, online portal will ensure all interactions are tracked and up to date.
Here are the features you ought to look for when evaluating different AT collections software solutions to see which one is the most comprehensive and capable.
We’re not afraid of going head-to-head with other AR automation providers, because we know we’ll win. But judge for yourself:
Collecting on invoices can be tricky. Here are some tips, techniques, and practices that can help your company get paid what you're owed.
Collections is primed for digitization. Discover the power of an automated, collaborative collections process.