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Collections: Huge Potential, Big Challenges

23-04-2021 5 min read

In-house Collections

The collection process starts when customers do not pay their invoices within agreed terms. The first stage of the collections phase is usually taken care of by a company’s in-house staff and it should be organized in a way that the collection effort produces its desired result. It is recommended that due accounts be collected on using non-litigious means, if possible because costs are lower than they are for legal collection procedures and the relationship with the customer does not get strained by a legal dispute. The aim at this stage is to collect on due accounts without losing any potential future business with the customer. The pre-litigious collections process is not regulated by law and it is within the supplier’s discretion to decide on how to organize and implement the process.


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Dunning Letters and Escalation Levels

Pre-litigious collections usually starts with sending out a dunning, or collection letter to notify your customer that an invoice has gone beyond terms and that the account needs to be settled. You should include the amount due, invoice date, invoice number, due date for payment, and the details of the bank account which payment should be made into. The dunning process is not regulated by law. In most cases, however, collection efforts include sending out letters, or reminders, to the customer. It is common practice for companies to send out three payment reminders, adjusting the tone of the letters as time goes on and invoices continue to go unpaid.

The first letter is a friendly reminder letting your customer know they are late on their invoice and asking them to pay their outstanding balance. If after sending the first collection letter you do not hear back from your customer or you do not receive payment, it is time to send another letter, which should be assertive yet professional and prompt the customer to pay. If after sending several dunning letters the invoice continues to go unpaid, you can take legal action to collect on the past-due balance.

Huge Potential – Big Challenges

An efficient collections management is aimed at reducing your outstanding balances (DSO), minimizing the risk of non-payment and optimizing your working capital. Collection strategies, however, vary from region to region. In some countries, it is common business practice to use various means to collect on past-due invoices. In other countries companies refrain from sending out dunning letters so as not to strain the customer relationship but instead notify their customers of an upcoming due date via phone (proactive collection management). This presents companies with big challenges since collection management processes vary depending on region, payment behavior, industry sector and customer portfolio (B2B vs. B2C).

Growing Accounts Receivable, Complex Processes

Even though all companies face the same challenges, their response to the requirements resulting from these challenges is different. There are, for example, considerable differences in how collection management is organized internally – some organizations assign collections to A/R Accounting, others have a specialized collection department and yet others have national or international shared service centers. And within these departments, there are employees with different skills and career backgrounds that take care of collecting on open accounts as efficiently as possible.

Having a successful collection management in today’s economy means collecting accounts receivable as efficiently as possible with as few employee resources as possible who all have different skills and professional backgrounds. In order to be efficient in their work, collection specialists need an expert software solution to support them in handling the variety of processes they need to cover.

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