If cash is the lifeblood of a business, the revenue cycle is the circulatory system. The process of extending credit to customers, billing them for goods or services, and applying remittances to open receivables all pump blood through the body of a business. Delinquent customers and bad debt keep blood from circulating. They cause write-offs, dent profitability, and increase the cost of collections.
This month we delve into the percentage of active customers that are delinquent at any time during the year. By definition, a customer account 30 days past due is generally considered delinquent.
APQC’s benchmarking data on this measure, which includes responses from more than 500 organizations, shows that those in the 25th percentile (better performers) have 40% fewer customers delinquent at any time than those in the 75th percentile (worse performers). In general, most businesses shoot for a target of 10% to 15%, depending on industry and other factors.
Mitigating the risk of delinquent customers begins before customers walk through the door, whether physically or virtually. Integrated systems provide a holistic view across the revenue cycle. That helps set the stage for finance to make effective credit decisions, offer faster billing and enhanced payment options, and streamline dispute resolution.
Here are some other ways to boost credit and billing operations.
Integrate Revenue Cycle Systems
Integrate credit, order management, customer billing, accounts receivable, and collections applications to provide a comprehensive view and facilitate customer service.
Analyze Credit Risk
- Use credit risk scorecards to establish proper customer credit limits. These mathematical models estimate the probability that a customer will become delinquent or default based on historical data and its current or proposed credit position.
- Leverage the credit system to generate credit holds, update credit limits, and produce credit limit tolerance reports. For example, if a customer's outstanding credit balance exceeds its credit limit, put orders on hold.
- The finance team should automatically notify sales and order management teams when customers run into financial difficulty.
Provide Billing Options
- Clearly define all payment terms, including the cost of all goods and services, payment due dates, early payment discount schedules, and late payment penalties.
- Send customer invoices as early as possible following the completion of a project or service or when goods are delivered.
- Provide multiple electronic customer billing options. Invoices can be generated automatically and sent to customers electronically. Billing activities can be reduced or eliminated using credit cards, direct debit, procurement-card programs, or an invoiceless evaluated receipts settlement process.
- If feasible, configure your billing system to send automated payment reminders ahead of the due date using the customer’s preferred communication channel.
- For new customers or customers with poor credit, require a deposit on high-dollar purchases or contracts.
Accelerate Dispute Resolution
- Provide an online self-service tool to initiate disputes.
- Use automated workflow to manage the communication, escalation, and resolution of customer disputes.
- Assign a dedicated finance team member to track, manage, and reduce the root causes of billing adjustments and disputes.
Done well, the strategies above are a win for finance and for customers because they improve visibility, leading to more robust decision-making, clearer communications, and a professional approach to dispute resolution that preserves customer relationships.
Perry D. Wiggins, CPA, is CFO, secretary, and treasurer for APQC, a nonprofit benchmarking and best practices research organization in Houston.