Don’t Neglect the Small Stuff:

Tips for Keeping Your Collection Engine

Running at Full Power

By David Schmidt

It’s accepted wisdom in management circles that applying the 80/20 rule to credit and collections is the best way to maximize cash flow. That is true to a point. However, many credit functions get in trouble because they are unable to simultaneously handle the small stuff quickly and efficiently while still concentrating on servicing their most important customers. When that happens, overall performance drops because of the mass of problems that will surely accumulate from the 80 percent of the receivables being under serviced. In particular, collection efforts suffer because too much time is being wasted putting out the fires that are burning holes in you’re A/R.

Identify Your Bottlenecks

The problem is solved with systems, manual or automated, that facilitate the rapid handling of small and mid-sized accounts. Identifying A/R bottlenecks and then streamlining your procedures in order to remove these impediments to productivity will return cash flow dividends. There are any number of things that can cause an A/R bottleneck, but they are all identified as activities that provide relatively small returns for the time they consume. They also tend to be repetitive and clerical in nature, which is why automation can be used so effectively. Collection automation has proven very effective because of the productivity tools it provides. Portfolio-based credit analysis software also provides benefits by accelerating the new customer and order approval processes. However, you need not totally automate to overcome your bottlenecks.

After identifying the bottlenecks in your system you can take steps to eliminate, or at least minimize their impact. Below are suggestions for handling four of the most common bottlenecks:

1. New Account Processing - It takes a lot of time to gather information, check references and analyze all the data. After going through all this, most accounts are then approved for open terms anyway. A simple solution is a greater reliance on credit scores for accounts that will be ordering small to moderate amounts. Though many credit pros dispute this, credit scores provide greater predictability of delinquency than one by one credit analysis. Relying primarily on scores saves the time spent checking credit references (though you should file them away if questions arise later) and analyzing every new account. You also save money, because credit bureaus charge less for credit scores than they do for full reports. Another solution is to hire an outside service bureau to handle new account processing.

2. Order Approval - Many credit departments use the daily credit hold listing as a sort of reminder queue for making collection calls. The proof is in the fact that by the end of the day, most orders will end up being released. The problem with this habit is that while these accounts are being contacted for payment, customers that owe more and are further past due are not being contacted. Obviously there is a point at which you must hold up orders because of slow payment, but most companies set the bar far too low. The solution is to raise the bar so more orders are automatically approved. Again, credit scores are useful in identifying the accounts that need to be checked before shipment.

3. Small Dollar Collections - It is usually impossible to reach every customer by phone every time they need to be contacted. It is easier than ever, today, to generate correspondence on a PC and then fax or mail the customer. The idea is to find a way to do it en mass and to do it as soon as accounts go pass due. Remember that faxes and email are more effective then letters, and that if the customers do not respond after two notices they will probably need a phone call. Another way to save time is to have a clerical employee generate this correspondence rather than a collector or find an outsourcing partner to assume part of this burden.

4. Deductions - Short payments have become pervasive and they are growing. If you do not have good systems for handling them, they will eat up resources like nothing else. There are a number of ways to process deductions, but your system should first of all isolate them. This allows separate handling from other collection activities, possibly by an outside service. In addition, deductions need to be identified by type and quantified so that management can more readily see their impact and work out system solution to prevent their recurrence (most of your deductions result from things your company does).

Devote More Time to Collections

Once your bottlenecks are history, the time saved needs to be re-allocated to contacting more delinquent accounts for payment. Eliminating bottlenecks thereby increases your collection capacity whether or not you invest in credit and collection automation software. As you devote more time to making collection contacts cash flow will increase, past dues will diminish, bad debts will decrease and fewer orders will bounce onto credit hold. In other words, fewer accounts will get caught in your bottlenecks, giving you even more time to concentrate on your top tier of accounts and bringing in the cash.

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