3. Optimise your debt collections processes
The two previous strategies should help you cut the number of potential outstanding accounts receivable down to a reasonable level. It is then of paramount importance to deal with these proactively and efficiently. Especially in the present economic environment, abandoned outstanding receivables will not be settled on its own or by your customers.
The first step to improving control over your debt recovery is gaining insights into the current status of all your accounts receivable. Which receivables could probably be collected? Which receivables are on its way to becoming bad debts? What hampers your collections efforts? Where do the problems persist? Common methods for assessing accounts receivable are accounts receivable ageing, accounts receivable turnover ratio, and average collections period. In combination with those analyses, you can use certain metrics as key performance indicators (KPI) to maintain standards and benchmark your debt collections activity. Typical working capital metrics include DSO, the percentage of outstanding receivables, the percentage of write-offs, and the percentage of collected amounts. By areas where the numbers rise or decline unfavourably, you can drill down to the details behind them. Were the payment terms overridden? Have the customers' creditworthiness assessments changed?
These insights and reports will assist you in keeping tabs on all your accounts receivable, making a move at the first signs of trouble, and coming to grips with any potential issues. They should preferably be part and parcel of your weekly management activity. Because the earlier accounts receivable issues are addressed, the less damage they could inflict on your cash flow.
The second step to improving control over your debt recovery is performing debt collections activities timely and methodically. The specific actions and the order in which you need to carry them out depend mostly on the guidelines and protocol of your company; however, there are approximately three occasions in a collections process where you could influence the outcome substantially. The first occasion is when your accounts receivable just become overdue. It is best to contact your customers without delay to remind them in a friendly way, or to find out the reasons behind the deferment. At times, this nudge is enough to make the customers settle. At other times, this communication signals that you are not going to let the outstanding receivables slide. The second occasion is when your customers evade making payments. This usually occurs after several attempts to collect from your side with the customers remaining unresponsive or making empty promises. Sales might need to intervene at this point to decide if you are going to implement any penalties for late payment mentioned in the payment terms, or if you are going to negotiate any repayment plans. Debt collections agencies can also be involved to convey to your customers that you take their recalcitrance serious and are escalating your debt collections effort.
The third occasion is when it is apparent that your customers show no intention of settling and you have exhausted all amicable debt recovery options available. As a last resort, you can take legal action against the customers. Litigation is known to be expensive and lengthy, so it is important to get advice and support from experts to effectively navigate legal proceedings. The chance that you could successfully collect payments is obviously higher between the first and second occasion. Getting the timing right for all of your outstanding accounts receivable can be challenging if you do not prioritise debt recovery, your current process is lacking, or your staff are not trained to conduct debt collections activity properly. You will need to solve the problem of resource allocation first and foremost before you can get the collections process right consistently and improve your liquidity.