Collections and disputes – the last line of defense for financial stability
In terms of contribution to financial success and stability, collections is one of the most important O2C functions. And it has its work cut out for it as we all grapple with an increasingly global market: according to Allianz’s most recent assessment of global collections, 48% of international trade receivables are “very high” in terms of complexity of default, with a further 15% showing “severe” complexity.
The chief causes of this complexity vary between markets, but poor payment culture (79%), alongside badly-agreed or upheld payment terms (69%), and limited capacity to collect cost compensation outside of contractual terms (48%) are recurring culprits. Excessive DSO is cited as a top difficulty for a 33% of all markets.
Although e-invoicing regulations are slowly changing the landscape by opening up both more transparent payment approaches and more legible audit trails, it’ll be many years before e-invoicing is regularized enough across all major markets to reduce the inherent complexity of collections. Keeping track of invoices, due dates, reminders, delinquency, bad debt, and write-offs internationally poses a real systemic issue for AR teams. Especially since there’s a strong correlation between the complexity of a region’s collections landscape and that region’s default and insolvency risks.
On top of this, different business cultures and expectations serve to create competing systems and processes for managing collections in different regions and business units. All in an environment where regulators, investors, boards, and stakeholders are demanding greater transparency and insight into your overall working capital position and forward growth trajectory.
Managing global collections requires a high degree of centralization and standardization to equip CFOs with the visibility of the organization’s total receivables and their overall health. (Along with the insights they and their AR teams require to keep DSO low and allow working capital to be accessed as quickly as possible for reinvestment into growth).
But this centralization must also be paired with a degree of flexibility for individual operators and collections managers in specific regions to handle each step of the process according to the customs of the local payment culture.
Striking this balance is only possible with a mixture of globally applied policy and master processes combined with regional discretion in how these processes are fulfilled.
And achieving such a mix and ensuring it works is only possible with the right technology assisting collections teams in their efforts.
The answer for CFOs and AR directors lies in automating much of the data collection and analysis work that currently underlies most collections workflows. Today, we’ll explore how correctly applying automation not only helps AR teams bring in the money your organization is owed faster, but does so while improving your customer relationships and providing everyone in the finance department from the CFO down with full visibility of the current receivables reality, bad debt ratio, forward financial health, and risk exposure position.
The status quo in collections
If you’re working in a typical organization, a lot of different steps go into collecting a customer invoice before you reach for the “nuclear options” of service suspension, court proceedings, and bad debt write-offs. Options your teams may be reluctant to pursue even in the worst cases, as many markets have both overly-complex insolvency proceedings and limited statutory options for the recovery of bad debt.
The standard collections playbook takes the form of date-specific reminders sent at policy-dictated intervals before and after the invoice due date across various channels, alongside offers of support or customized payment plans for repeat offenders and threats of reduced credit terms for non-compliance.
And while that sounds relatively simple in theory, in practice, sending a reminder can often pose a real challenge in a manual operating environment.
Collections teams must keep on top of information from a huge range of sources. This can include everything from customer contact data (which may not always be up to date), other relevant customer data like credit agreements and payment, organization-level data like policies on reminders and debt recovery processes (all of which can contribute to determining the exact course of action needed), the invoice itself, and histories of contact attempts and other interactions, timelines for next steps, and any relevant information on settlement agreements.
In a working environment dominated by email chains, PDF documents, Excel spreadsheets, and phone calls, keeping on top of all this information can be a mammoth task. One that makes an individual collection case far more complex and drawn out than it needs to be. And manually tracking and actioning tasks across an entire portfolio represents and even greater challenge. It’s all too easy for individual cases to fall between the cracks due to simple oversights, and for processes to stall and grow in complexity with time.
Something as simple and innocuous as a temporary absence can lead to disruptions to workflows that increase DSO and jeopardize your organization’s cash flow position).
And this is a real problem
A slow collections process isn’t just annoying for those involved and for your forecasting teams. It can be potentially disastrous for your working capital position – opening your organization to financial risk that has the potential to snowball into a critical position very easily. (As well as undermine relationships with your customers and suppliers through ambiguous relationships and threats to your own forward payment and delivery obligations).
Consider the widely known, bleak reality of collecting late payments:
- An account 90 days past due has a 70% chance of being paid.
- An account 180 days past due has a 52% chance of being paid.
- An account 365 days past due has a 23% chance of being paid.
An inefficient collections process doesn’t just slow down payment: it actively contributes to the likelihood that overdue invoices won’t be paid at all. Increasing your chances of losing out on revenue and limiting your options for strategic investments and operational funding.
How automation solves the problem
Automated collections workflows eliminate ambiguity, error, and frustration from the process by providing your teams with a platform to manage every task from the flagging of a payment as overdue or soon-to-be overdue through to resolution.
Centralizing the data relevant to every collections case regardless of its original source eliminates most of the time and effort lost to hunting down prior communications and keeping on top of upcoming due dates. Unifying data into a single, easily-referenced interface also makes it possible to create comprehensive payment scorecards for each customer and information on outstanding invoices and balances which would otherwise have to be chased down manually from other parts of the finance department.
This means your credit clerks and everyone else in the reporting chain can instantly make assessments of overdue accounts and decide on actions for follow up. Intelligent automation combined with central data storage and globally applied policies also means that all tasks can be ranked in order of priority and provided to individual contributors in the form of a self-maintaining worklist.
This allows anyone to immediately see what invoices and tasks require attention, access information for a specific customer and client, and immediately see all open items that require attention.
Modern collections suites focus heavily on ERP integration. This allows this kind of approach to occur within your normal system of record, without the need to switch between solutions. This allows every case, action, and suggested follow up to be made visible to other individual contributors or managers in the event of absences or emergencies, without any need to manually track down information. Approvals for new credit agreements, settlement arrangements, and other escalatory proceedings can also be handled directly from the solution without any need to refer elsewhere.
What does this mean for your teams? Let’s look at it from the perspective of every level of the finance organization:
Your credit teams benefit from a hugely simplified and entirely transparent process for their own work, and can easily take actions and make decisions that would’ve once taken days or weeks in the matter of a few minutes.
Every action taken within the system automatically creates a follow up action and adds it to the global worklist. Ensuring no cases are stalled or forgotten, and that every escalation is immediately forwarded to the appropriate individual or team for approval – including creating pre-approved payment plans for distress cases and escalating any cases which require approval due to previous delinquency.
For your wider O2C teams, centralized collection and disputes data helps to both realize and apply cash from overdue invoices more quickly, and in the creation of more realistic and accurate working capital forecasts. Your AR teams no longer have to worry about chasing up on the status of collection cases or worrying about invoices or bills being “lost” in the workflow: they’ll also be able to check up on the current progress of every pending payment centrally and consult with collections teams directly if they have any questions.
For your CFO and other senior stakeholders, FS2 Collections and Disputes acts as a single source of truth for the entire collections workflow, guarantees data integrity, and optimizes risk management concerns surrounding late payments. At the most senior levels, the solution creates an environment where CFOs can be sure that they’re only being asked to validate or approve items in disputes or settlement plans that they genuinely need to be involved in where their discretion is needed for concerns of risk appetite and overall strategic priorities.
We’ll talk about what a good collections automation system looks like—and how you can take steps to implementing one for your AR team—in the second part of this series.
Want to learn more about how Serrala can help you transform your collections approach?
If you can’t wait till we upload part 2, get in touch with one of our experts to discuss your collections challenges and see how we might be able to remove some of the complexity.
