While it’s well understood that a healthy cash flow is the lifeblood of every business, a surprising percentage of CFO’s across all industries don’t implement an accounts receivable strategy. This is a flagrant missed opportunity. By adopting a strategy based on categorizing and prioritizing customers, you can increase the efficiency of your collections process and strengthen the health of your business.
The Effective Accounts Receivable Strategy: Prioritize, Then Conquer
One of the oldest and most inefficient methods for collecting debt is prioritizing the follow up based on the aging report. Targeting customers based on each invoice’s past due time might seem like a logical way of tracking down payments, but it’s a flawed method, as it assumes that the most overdue invoices pose the most financial risk. While the aging report provides a handy snapshot of the overall health of a company’s customers, it does little in helping CTOs, receivables managers, and bookkeepers shape a plan of action.
The key to an effective accounts receivable strategy is segmenting customers. The aging report assumes that each customer can be approached in the same way, but the reality is that no two customers are alike. They may pay late for a variety of reasons, and each requires a finessed approach based on the relationship and the history of payment.
There are a handful of ways in which you can segment your customers. Accounts receivable software can be helpful as you begin this process, as it allows you to easily view account age, average days late, current days late, and other factors such as company size and type of industry. While you may tailor a criteria that best suits your business model and payment schedule, each customer should be placed into one of three categories.
- Your top customers are those who routinely pay on time, or those accounts that are so large that you need not worry that payment wont be delivered
- Your average customers are those that require routine follow up—and valuable time—but ultimately, you know that they will pay you eventually.
- Your poor customers are those that exhibit one or more red flags on a regular basis. They require so much follow up and owe you so much money that you may consider dropping them as customers. In some cases the account may be too crucial to drop, but the customer causes you frequent headaches.
After categorizing your customers, determine what percentage of your clients land in each category. This will give you an overall idea of how your accounts receivable is functioning, and can provide a starting point metric on which to improve.
Finesse Your Client Relationships
Now that you can identify each customer by category, you can take some measures to ensure that your top customers stick around, and your poor customers do not become more of a hassle than they’re worth:
- Customers that land in the poor category may best be handled by a third-party collections agency if the follow-up is taking too much time away from you or your staff. Follow up quickly on all promises and payments. Document every bit of communication with the customer so that you can find patterns (i.e. Are they routinely disputing small items? Do they claim they “never received” the original invoice?”). Adjust the tone of the follow up email to one that is harsher in nature, and, if all else fails, send them to a collection agency. If these customers remain a major headache, it might be worth discussing if their business is worth the hassle.
- For customers landing in the average category, your goal should be to turn more of these customers into top customers, and—at the very least—take measures to ensure that they don’t become problem customers. Contact them early and consistently so that they see that you closely monitor their accounts, and thank them when payments are received.
- The goal with your top customers is to ensure that they remain in that category. Words of thanks in a hand-written note, or a nomination for a business award can go a long way. Frequent check-ins about the services you are providing can also help you spot possible grievances before they become a deterring issue.
The bottom line: Knowing where to turn your efforts is what separates a stellar accounts receivable strategy from an inefficient one. Showing appreciation and dedicating time to the top and average customers will result in a healthier cash flow. For the customers in the “poor” category, it’s time to fish or cut bait. They may best be handled by a third-party collections agency, or dropped as a client completely.
An effective accounts receivable manager may help provide key metrics as you segment out your customer categories.