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How Small to Medium Sized Businesses are Improving Cash Flow and Reducing Costs with Credit and Collections Automation

Small and medium sized businesses making the move to automate their credit and collections processes

Written By: Art Hernandez, VP, Product Management

Small to medium businesses that automate collection management and dispute resolution realize an immediate and substantial increase in cash received. These companies have come to understand that the benefits of a fully automated receivable management process are transformational.

However, many organizations of this size are faced with challenges due to lack of IT support or capital for upfront software costs. That is why they are turning to a subscription based service delivery model for software. Software-as-a-Service (SaaS) allows companies to implement solutions and begin to benefit immediately by accessing software tools via the web using a subscription basis.

HOW TECHNOLOGY IS HELPING TO CHANGE CREDIT
Automated decision systems, credit scoring, data warehousing are great tools for fulfilling the classic role of the credit professional: landing the business. They can dramatically accelerate the speed of decision making, lower the cost of sales, and improve cash flow. And they do it by putting the routine credit decisions where they belong – on sales reps’ laptops. The big payoff from the technology revolution is not so much the ability to crunch numbers. It’s the ability to locate information and to use it intelligently.

New systems are emerging that are designed specifically for the credit and collection industry, and specifically for the small-medium business. These systems are built by credit and collection professionals, and are developed to automate the collection process and do so in such a way that there are not heavy investments in IT or software licensing costs. The result has been a shift, from the manual processing of clerical tasks to an automated system with mass faxing, call scheduling, account management, contact management, prioritization, tracking and reporting – all available via the web. These activities can be performed more efficiently when facilitated by an automated system, leaving more time for the collector to make contacts and perform tasks that simply cannot be automated.

THE COLLECTIONS PROCESS - UNDERSTANDING THE NEED FOR AUTOMATION
Instead of spending their time with customers, many collectors are chasing down information and re-organizing the information into a usable format, and in many cases, toggling between an A/R system, a spreadsheet program and a slew of paper. The benefits from fully automating the collection process are transformational. Rather than spending most of their time gathering information and documenting problems, collectors using an automated collection system are able to devote the bulk of their time to contacting overdue customers. The result of this renewed focus on a collector’s core responsibility is much improved corporate collections.

In effect, automation provides collectors with a scarce commodity - time. The primary advantage of a fully automated system is the capacity to contact two, three or even four times as many accounts each day. A re-engineered computerized collection system will also create its own intelligence. There will be a sharp increase in calls and mass correspondence sent. As a result, companies that automate collections can realize an immediate and substantial increase in cash received and an on-going improvement in all measures of collection performance.

THE COLLECTIONS CYCLE. .
The collection cycle consists of five distinct steps: prioritizing, preparation, contact, follow-up, and reporting. By eliminating or automating many of the clerical activities that consume so much time within these stages, collectors will have more time to spend making contacts. An automated system helps facilitate the process, bringing organization and strategy to each step.

Prioritizing
Determining which accounts to work on, whom to call first, and when to send correspondence is critical to an effective collection system. When prioritizing is performed manually, it takes a considerable amount of time and the outcome is often inconsistent. Valuable time is often lost in the very first step of the collection cycle.

Preparation
Gathering information and resources will enable collectors to effectively and intelligently ask their customers for payment. If this information is not available from a single location, the collector will need to spend extra time hunting and gathering in preparation of each contact. An automated system can bring organization, classification and categorization to this step.

Making the Contact
This step is central to an effective collection operation. The more contacts that can be made, the faster the money will be collected. Since it is unlikely that a single method of contact (call, fax, etc.) will get the job done, there should be guidelines indicating a strategy of how and when the different tools should be used. By instituting a strategy, the results can be evaluated periodically and the methods can be adjusted as necessary.

Follow-up
Without effective follow-up procedures, a collector’s efforts at making contact can be rendered useless. Ideally, follow-up activities will be executed during the contact process, while the customer is still on the line, or within seconds of the call’s termination.  Many of these clerical tasks can be automated, freeing the collector to make more contacts while ensuring that this crucial step is completed.

Reporting
Without feedback, it is impossible to measure the effectiveness of the collection function. In order to obtain the maximum from collection efforts, it is vital to put into place a systematic approach to evaluating the effectiveness of your system and activities. This information will also prove to be of value to the sales and customer service organizations. Using reports, collectors will be able to better prepare for the next contact, which will in turn, improve each step of the collection process.

GOALS OF AUTOMATION, STRIVING FOR DRAMATIC IMPROVEMENTS
Simply automating current practices will not bring about dramatic improvements. In order to truly see results, there must be a solid understanding of the collection process, allowing for real improvement. By starting with the collection cycle, a number of opportunities become obvious.

Since much of the cycle is spent on support activities - prioritizing, preparation, follow-up and reporting - it makes sense to eliminate, shorten or otherwise reduce the time spent performing purely clerical tasks. If collectors can increase their daily contacts they will most likely increase their chances of bringing in more money faster.

STRATEGICALLY MANAGE YOUR ACCOUNTS
An automated tool that can be configured to initiate different actions at pre-defined intervals will help you manage the collections process, ensuring that every customer is contacted by fax, email or phone using pre-established templates and scripts. For instance, you can configure the system to automatically send the customer a courtesy reminder notice several days before an invoice is due.  You can also create customer categories that are assigned different collection strategies, internal reminders and automated notices.  The outcome is a more efficient and standardized approach to managing accounts.

ACCELERATING CASH FLOW
Enhanced cash flow has become a critical measure of an organization, often carrying more weight than profits or shareholder value. When a company stops generating positive cash flow, growth is impacted, investors become concerned, capital improvements are canceled or delayed, and future capacity and productivity is affected.

One way to enhance cash flow is to set aggressive goals for Days Sales Outstanding
(DSO). A low DSO means a faster cash flow. If a company can turn over its receivables, say, every 40 days rather than every 50 days, over the course of a year that can translate into A/R turning over nearly two more times than before. A/R will have been reduced by 20 percent, which can save millions of dollars.

INCREASING CUSTOMER CONTACTS
Obviously, the more customer contacts made, the more receivables will be collected. When re-engineering the collection process, it is important to use as few steps as possible to accomplish tasks. In so doing, unnecessary steps are eliminated while those that remain are simplified. This results in a streamlined process that takes less time and is also likely to reduce errors. Redesign and automate several collection activities, and each collector starts recovering a significant amount of lost time that was previously tied up in clerical tasks.

It is common for the number of collector contacts (voicemail messages excluded) to more than double as a result of automating the collection process and improving collector productivity.

IMPROVING QUALITY AND EFFICIENCY
In terms of collections, the problems that most often arise are customer service issues. A goal to cut the average time to resolve disputed invoices from 120 days to 60 days will require dramatic improvements in the resolution process as well as the elimination of the disputes causes in the first place.

The ability of an automated system to track and identify recurring problems helps tremendously in bringing invoicing and pricing issues to a quick resolution. Being able to track the involvement of people from other departments within the company allows collectors to deal more effectively with customers while encouraging their fellow workers to resolve outstanding issues.

REDUCING COSTS
More efficient collection procedures not only give a company more value for each dollar it has been spending but will actually reduce the number of dollars it spends in the future. In addition, bad debt expenses will be reduced over the long term. Automated collections will enable a company to reduce the average age of its accounts receivable, which also serves to reduce the amount of risk in accounts receivable. Down the road, there will simply be fewer and smaller bad debt write-offs. Fifty percent reductions in bad debt expense are not uncommon for companies that automate collections.

BENEFITING FROM AN AUTOMATED COLLECTION SYSTEM
The clearest benefit to an automated collection system is the ability to collect receivables faster. Automation translates to structure and organization. By employing a system to manage and prioritize calls, send correspondence and track the results, companies can become proactive in their approaches. Collectors and analysts should be spending their time with customers, or with the data, using their knowledge and skills to reduce DSO and increase the cash collected. However, all too often, their time is wasted as they toil with clerical tasks like faxing, letter writing, and the practice of gathering data.

Automating allows collectors to schedule appointments, maintain records of contact, prioritize contacts, set reminders and faxes, email or post mail right from their desktops while talking with the customer.

AN AUTOMATED APPROACH TO INVOICE PROBLEM MANAGEMENT
The timely management of invoicing problems can make a dramatic difference in your ability to collect outstanding balances. Additionally, it will affect your customer relationships and help tighten your operating ratio. This can be accomplished by instituting a system to help manage and track your problem invoices. With less disputed transactions, collection activities will be more effective, decreasing the carrying costs of receivables. Increased customer satisfaction and a more proactive approach to dispute resolution will also result in less relationship deductions, contributing more to the bottom line.

PROBLEM TRACKING
When a new problem is logged into the system, an automated tool can assign a specific owner and send an e-mail notification.  The owner can then log into the central system to view the problem and the system can manage the process by tracking the events using pre-built Auto-escalation Chains, configured with time intervals and pre-defined managerial levels.

If your customers are not paying because of problems with their invoice, whether it is due to pricing, shipping issues, or other discrepancies, that information must be handled appropriately to not only collect the balance due, but also reduce recurrence of the same problem, while maintaining a high level of customer satisfaction. For many companies, the reality is that over 70 percent of disputed invoices are simply written-off, and for some that figure is as high as 95 percent. Good news for the customer maybe, but is it good news for you?

IMPLEMENTING AN AUTOMATED COLLECTIONS SYSTEM
If a company allows its competitors to collect money faster, then the company will be fighting an uphill battle on several fronts. First, the company that does not automate collections will be paying additional carrying costs on funds tied up in their accounts receivable as opposed to those companies that automate. Second, the company that automates is more likely to be paid by any cash-strapped customers at the expense of its non-automated competitors. Lastly, companies are able to use the intelligence created by their automated collection system to improve other business processes and enrich customer satisfaction - chores that a manual collection process does not accomplish.

If automating collections is clearly advantageous over collecting with a manual process, then the question of cost must be addressed. The tangible costs of purchasing and implementing collection software, as well as the hard dollar benefits, are calculated easily enough. In contrast, the physical time and effort to install collection software is not so easily quantified. However, the good news is that automating collections does not have to be a long, drawn-out, difficult process.
For one thing, it is not necessary for every company that wants to automate collections to re-engineer the collection process. A good collection software package will have already done that. In addition, installing collection software is not the same as installing or upgrading accounting software. With the latter, there is usually a period of running parallel, during which both the old and new systems function in tandem until there is an assurance that the results from the new system are identical to those of the old. With collection automation software, this is not necessary because the software does not affect financial record keeping.

Also, because collection automation software draws information from the accounts receivable database but does not send any data back, customization is minimal. The collection software can be configured to interface with any accounts receivable system. As a result, many companies that have chosen to automate collections are able to complete the project in only a month or two.

THE OUTCOME OF AUTOMATING A RECEIVABLE MANAGEMENT SOLUTION
Once the decision has been made to automate the collection process and collection software has been selected, it is not unreasonable to expect a return on this investment by the next fiscal quarter. Time and time again, automated collection systems have started yielding dividends almost from day one, with significant results achieved within the first 4 to 6 weeks.

The decision to automate collections should not be taken lightly, but in the final analysis, it is the key to dramatically improving collections. Once the system is in place, all areas of the organization will be working together to improve processes and procedures throughout the organization. By applying a strategic approach to collections, eliminating clerical tasks, detecting problem areas, and gathering the necessary data to produce detailed analysis, change can be instituted. An automated and strategic approach to receivable management will be a driving force; gathering critical information, disseminating the information, tracking progress and reporting on the results for ongoing internal process improvement.

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