In a perfect world, every customer would pay every invoice in full and would do so in a timely way. Unfortunately (and as any CFO knows), that’s not the world in which we live.

Collections is an essential process for working down outstanding accounts receivable and unpaid balances to bring in cash. Still, companies must always be cognizant of the time and effort spent to process collections and mindful of valued customer relationships.

Smart companies take a strategic approach to the collections process by prioritizing and stratifying past-due receivables, setting tolerance limits, establishing strong policies for credit and collections, and negotiating with customers where appropriate.

This month’s metric, the total cost to perform the process “manage and process collections per $1,000 revenue,” includes the sum of fully-loaded personnel cost, outsourcing, overhead, systems, and other costs related to collections, per $1,000 of annual organizational revenue.

The collections process includes establishing policies for delinquent accounts, analyzing delinquent account balances, corresponding and negotiating with delinquent accounts, discussing account resolution with internal parties, processing adjustments and write-off balances, performing recovery workouts, and managing default accounts.

Data from APQC’s Open Standards Benchmarking database shows a significant gap between top and bottom performers when it comes to this metric. Top performers spend about 20 cents on managing and processing collections for every $1,000 of revenue, while bottom performers spend close to five times that amount.

Collections Pitfalls

Several pitfalls contribute to a higher cost for collections. Some of them occur before the customer is invoiced. If members of the sales team enter incorrect or incomplete customer or purchase information into the system, for example, this could certainly cause issues on the back end that make the process more costly.

The knowledge and experience of collections team members can make an impact on the cost of this process as well. If the team isn’t properly trained and doesn’t have adequate resources to resolve an issue (for example, information about the unpaid invoice, where to find the information, whom to contact about the invoice), the collections process could be slower and more costly. Ineffective collections teams might also lack knowledge of industry-specific payment norms that could have a bearing on the timing and strategy of collections efforts.

A third potential pitfall that could drive up the cost of the collections process is a failure to prioritize the right accounts. If you’re committing a significant amount of your collection team’s time and effort to low-dollar unpaid invoices, you will receive a lower return on your collection efforts, which keeps the total cost of the process higher.

Drivers of Cost-Effectiveness

One of the most straightforward ways to bring down the cost of collections is working to ensure that the organization’s focus is in the right place. Stratify accounts between high- and low-dollar amounts and prioritize the accounts that make up the most significant percentage of unpaid invoices to get more value from the process.

Once you’ve stratified your accounts, work to determine tolerance levels for outstanding invoices and policies for writing off any that fall below those levels, so you can move on to invoices that are higher-dollar. That will make a more significant impact on the bottom line.

Relatedly, every organization would be well-served by equipping collections teams with a clear and well-communicated set of policies and parameters for negotiating payment with customers. If customers become delinquent, work with them to arrange payment plans or accept a lower payment. The lifetime value of a customer is often higher than the debt they owe, and finding a compromise can sometimes be the best solution for all parties in the long run.

There may, of course, come the point beyond which flexibility is no longer a virtue. Your customer may thank you for your patience as they repeatedly claim that the check is in the mail, but at a certain point, giving customers too much leeway can harm your business.

Customer self-service tools can make a significant difference in the cost and effectiveness of collections as well. APQC’s research found that organizations that leverage customer self-service mechanisms for issue research and resolution report significantly lower collections cost per active customer. They also have lower days sales outstanding than organizations that do not use such tools.

Breaking down silos and ensuring other departments and areas are aware of any issues will also help lower the cost of the process. APQC found that survey respondents whose collections departments routinely share information about slow-paying or uncollectible accounts with the credit function reported a significantly lower collections cost per active customer. They also had substantially fewer collections FTEs and significantly lower total uncollectible balances as a percentage of revenue.

Unpaid invoices do happen, but there are ways to make the collections process more efficient and cost-effective. Top-performing organizations spend less on the process by taking a strategic approach that includes prioritizing high-dollar accounts, training up their collections teams, and knowing when and how to negotiate with customers to help ensure that the cost of collections stays low.

Perry D. Wiggins, CPA, is CFO, secretary, and treasurer for APQC, a nonprofit benchmarking and best practices research organization based in Houston.

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