Estimated reading time: 8 minutes
Effective debtor management is essential for companies and organisations to stay focused on the future. Fortunately, many companies have made the switch to some form of automated accounts receivable (i.e. debtor) management in recent years, through debtor management software. The days of working with excel lists and sending out reminders “when appropriate” seem to be over for good.
If your company is considering taking the step towards more efficient accounts receivable management, with the emphasis on automation, you are already on the right track. After all, not doing anything about automatic debtor management can cause a lot of costs, hidden or otherwise.
What you’ll learn:
- the (hidden) costs associated with inefficient accounts receivable management
- more efficient accounts receivable management through the design and automation of procedures
- why more data and integrations provide automation and personalisation
- workflows facilitate the setting of priorities
There are various costs involved in debtor management. We can situate these costs in the following major categories:
- Administrative costs
Think of staff costs, the cost of sending (registered) reminders and e-mails, telephone costs, keeping notes, expenditure on software and data integrations, and possibly outsourcing to debt collection agencies.
- Opportunity costs
Opportunity costs take into account the missed growth opportunities for a company due to the unavailability of cash. Money tied up in accounts receivable cannot be used for investments, marketing or purchases.
- Forecasting costs
Without consistent accounts receivable management, for example daily or weekly, it is difficult to make cash flow forecasts.
- Financing costs
A lower cash flow may lead to mandatory borrowing.
- Non-recoverable debts
These costs are directly related to the age of the outstanding invoices. The longer an invoice is open, the less likely it is that you will be able to collect the money.
So there are plenty of reasons to keep outstanding invoices to a minimum. But how do you do that?
This is where iController, as a powerful and flexible software for debtor management, comes in. Customers using our software can improve important KPIs, such as reducing Days Sales Outstanding (DSO), and thus get more cash flow into the business.
At iController, we therefore promise a solid return on investment (ROI). At iController, we therefore promise a solid return on investment (ROI). Your open amounts will decrease by 30%, and end users will have up to 50% more time for important tasks calling for interaction and strategy.
In particular, we help financial teams and credit controllers to optimise the collection process with our software. In the following, we discuss various components within this process that you can optimise, and which can significantly reduce the above costs.
Centralise data with debtor management software
You might not expect it, but many costs are incurred before even a single invoice is issued. When the sales team enters incorrect information or incomplete purchase data into the CRM system, it can make the order-to-cash cycle much more expensive.
And without data, you can’t do your job properly as an accounts receivable manager. Customer profiles need to be built up, and customer histories need to be preserved as well. This includes, for example, historical payment behaviour, credit scores from external parties, and your own data, which allows the accounts receivable manager to put defaults into an even better context.
The more data you have on your customers, the more automation and personalisation you can build in. The more data you have on your customers, the more automation and personalisation you can build in. And this data is best accessed centrally so that all parties concerned have access to the same pool of data. This way of working immediately opens many new doors. For example, you can receive notifications when something goes wrong. We don’t need to tell you that this can save a lot of time and money!
But data is only useful if it is correct. That is why it is best to set up integrations with CRM programs, and ERP and accounting software, so that at least the source data is correct.
Automatic procedures are a crucial part of iController. When certain conditions are met, outstanding invoices can automatically be entered into pre-determined procedures. These can include actions that enter the daily workflow of the credit controller.
With clear procedures you avoid many doubts and therefore potential discussions or disputes with customers. You can then, for example, put forward the option of a payment plan or partial payments. When customers are in a difficult period, this can certainly bring some relief. The lifetime value of a customer is often higher than the outstanding debt at that moment, in which case offering a temporary solution is the most appropriate approach.
The right workflow with debtor management software
An improved workflow is closely linked to the procedural approach. Customers are automatically assigned to certain procedures in iController, based on internal and external information. For a more personal approach, you can apply management by exception and indicate which customers are better off being followed up manually.
With workflows you optimise the actions and communication with your customers, for a customised service. Repetitive tasks are put on automatic pilot to free up time to focus on personal customer contact or more complex tasks that require extra attention.
And by eliminating silos within the organisation, and for example sharing better information about difficult customers or about complaints, the collection costs per active customer can also be reduced.
Identify the ideal means of communication
An important step in an effective collection process is communication with your customers. If you can approach the debtor directly and communicate in a consistent way, this can greatly simplify the entire collection process.
But communication costs can quickly mount up, especially further on in the process when registered letters or e-mails are involved, or when collection agencies or other legal means have to be used.
That’s why we set up procedures and work in a targeted way, which is perfectly possible with automated accounts receivable management. We will also communicate with customers in the way they prefer. If they have indicated that they would prefer to receive an e-mail or text message as a brief reminder, you can indicate this in the customer history.
Once that is done, try to automate as much of this process as possible and set up the procedures accordingly. And don’t forget: by incorporating payment links into these automatic procedures, for example, you increase the chance that people will pay more quickly.
By automating procedures, you can roll out a multi-channel approach much faster and more easily. Again, the more you know about your customers’ payment and communication preferences, the more you can tailor your communication.
The first reminder is sent by e-mail, the next by letter and when invoices remain outstanding for too long, a registered letter is sent.
Pay more attention to your invoices
It may be useful to review your invoicing process in order to improve your collection process. Be sure to include all necessary information and details on the invoice so that customers can easily make their payments. Don’t forget the payment terms. And don’t wait to send out invoices after the service has been provided.
Set priorities and focus
Not setting the right priorities in your customer base can cost your company a lot of money. For example, if you spend a lot of your team’s time on low-value outstanding invoices, obviously the return will be lower, and the cost of the whole process will remain high. Because the focus is not on the defaulters with the highest outstanding amounts.
So how do you bring the costs down? By maintaining focus. Make a distinction between accounts with higher and lower amounts and prioritise the ones that make up the highest percentage of unpaid invoices. Through dashboards and reports you can easily get this information from iController software.
Once you have broken down your accounts in this way, set up a process whereby you “write off” certain invoices under a certain amount. This way you can quickly switch your attention to invoices with higher amounts, which when paid, also have a larger impact on the cash position.
Lost productivity and personnel costs
This automatically brings us to the next point: productivity. The two points above, on procedures and workflows, make accounts receivable management much more efficient and save teams a lot of time.
But the knowledge and experience of the credit professionals also have a role to play. But the knowledge and experience of the credit professionals also have a role to play. A team that is not properly trained and does not have the right tools will slow down the collection process considerably. For example, when the team does not have all the information regarding an unpaid invoice, or when they are unsure who to contact regarding the invoice. Once again, the right software will lend a helping hand.
Reduced credit insurance
Companies can take out credit insurance to protect themselves against customers who do not pay their outstanding invoices. Credit insurance helps keep cash flow stable, but it is not cheap. Insurance companies are usually paid on the basis of turnover, which can quickly mount up.
With an efficient accounts receivable management process, there is less need to take out credit insurance.
A major cost of allowing your customers to extend trade credit is that there is a potential risk that debts will not be repaid.
Even if a collection agency has to be called in, or the legal route is chosen, you will have to pay for these services.
You can’t completely rule out defaulters, but by relying heavily on features such as creditworthiness, credit scores and artificial intelligence (AI) predictions, iController aims to help you tackle this part of the order-to-cash process as thoroughly as possible.
Sometimes, as a company, you would like to have immediate cash flow. In which case, factoring is a way to already collect the amounts owed on outstanding invoices without any effort on your part.
Of course, this also involves costs and conditions, depending on the chosen factoring solution and factoring company. The costs can be considerable because the agency also factors in the risk associated with not being able to collect the amounts owed on the invoices. Also, consider the opportunity cost: is the value of acquiring cash faster higher than what the factoring costs you?
So there are many costs involved in debtor management, hidden or otherwise. Hopefully this article will make things clear. By taking a good look at your accounts receivable management process, you will see that there are many efficiency gains to be made.
Therefore take the step towards more efficient and automatic management of accounts receivable. The iController software for debtor management and credit management will certainly help you. Do not hesitate to contact us for a demo.