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.
Accounts Receivable Collections
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.
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What’s the “traditional” accounts receivable collections process?
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:
- Identify overdue accounts
- Assemble a repository of delinquent accounts
- Create dunning letters
- Review and send dunning letters
- Get paid… you hope!
- But sometimes you don’t…
1. Identify overdue accounts
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.
2. Assemble a repository of delinquent accounts
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.
3. Create dunning letters
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.
4. Review and send dunning letters
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.
5. Get paid…you hope!
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.
6. But sometimes you don’t…
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.
The issues with a traditional AR collections 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
1. Human error
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.
2. One-way communication
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.
3. Invoicing delays
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.
4. Sloooow payments
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.
5. Higher costs
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
The impacts of outmoded accounts receivable collection processes
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
Reduced cash flow
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.
Poor efficiency and employee (dis)engagement
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.
Damaged customer experiences
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
Learn how to identify and decrease your volume of delinquent accounts
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.
Best practices for improving traditional accounts receivable collections processes
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
Review customer credit ratings
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.
Grade your customers
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.
Invoice customers promptly
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.
Be clear about terms and due dates
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:
Offer multiple payment options
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.
Know your customer’s approval process
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.
Send reminders before due dates
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.
Improve how you handle AR collections calls
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.
Use an aging method to track uncollected receivables
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.
Offer early payment incentives
Encourage early payments by offering discounts or incentives to customers, as this can motivate them to settle their invoices sooner.
Document everything
Keep detailed records of all interactions and payment agreements. This documentation can serve as evidence if disputes arise and helps in tracking progress.
Put clear policies in place
Develop clear and consistent collections policies and communicate them to your team, and ensure everyone involved in collections follows them.
Invest in training and skills development
Train up your collections team to enhance negotiation and communication skills, because that’ll help them resolve payment issues more effectively.
The best best practice: Automate your AR collections process
The best way to improve your AR collections process is by moving from a manual to automated process by following these steps:
The CFO's Guide to Accelerating Collections
How to measure your AR collections performance
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
AR turnover ratio
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 →
Expected cash collections
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 →
Average collection period
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 →
Days sales outstanding (DSO)
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 →
Collection effectiveness index (CEI)
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 →
Average days delinquent (ADD)
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 →
Number of revised invoices
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 →
Staff productivity
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 →
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🎥 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.
The Accounts Receivable Performance Toolkit
Learn how RPT unlocked major savings after ditching paper invoicing and automating their collections process
What is accounts receivable collections automation software?
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.
How does automation improve the AR collections process?
What are the ways in which accounts receivable collections automation software enhances and accelerates the collections cycle? Glad you asked:
Comparing manual versus automated AR collections processes
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.
The essential guide to accounts receivable automation
Automating your manual accounts receivable processes will deliver tremendous benefits across billing, payments, collections, reporting, and more.
Here are 8 ways you can automate your collections process
Discover the benefits of automating B2B collections and learn 8 efficient ways to automate your collections process for faster, higher-quality results.
How to find the best accounts receivable collections automation software
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
Zero-touch collection
Avoid having to reactively nudge your customers by having features that let you target them before they become delinquent.
Real-time communications and dispute management
You should be able to chat with your customers in real-time over the cloud and manage disputes as soon as they arise.
Timely notifications
Receive notifications and other timely prompts to stay on task and focus on your collections priorities.
Detailed reporting and customer management
Have a centralized single source of truth for everything related to customers’ open AR and better understand the effectiveness of your collections efforts.
Guide and prioritize collector activities
Gain valuable, actionable insights into which customers require immediate attention and intervention, and let the software handle the rest.
Clean audit trails
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.
AR collections software features checklist
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.
Learn how Versapay compares against the competition
We’re not afraid of going head-to-head with other AR automation providers, because we know we’ll win. But judge for yourself:
How to Choose AR Automation Software
All AR collections resources
Collecting on invoices can be tricky. Here are some tips, techniques, and practices that can help your company get paid what you're owed.
The CFO's Guide to Accelerating Collections
Collections is primed for digitization. Discover the power of an automated, collaborative collections process.