Advanced Collections functionality inside your Accounting Software

From years of experience in Retail Banking systems, I have seen that one crucial business process is the Collections Process; the function through which the banking institution tries to collect overdue claims from its customers, while keeping the process simple, automated and with a high return rate. Obviously, there is a necessity for a System to support this process. Over the years, many software vendors have focused on that area, developing Collections-specific software and offering it “on the side” of the core banking system. Carefully designed and monitored collections processes have been implemented in banks, then in insurance companies and then in other areas of the economy, too.

But, I have yet to see small and medium sized businesses implement well-documented Collections processes, to manage their Accounts Receivable; especially in cases where sales are usually done “on credit” or the business model is not “cash-and-carry”. 

In many cases, we see A/R officers or line managers using traditional methods to a) identify and b) execute a collection action. If we are talking about a typical SMB with a small ERP or accounting software in place, they are usually using “open balance” or “overdue” reports to identify bad customers and then they are picking up the phone to call them and, maybe, get a promise for payment.

But, implementing new, solid and automated Collections processes in the typical SMB may have the same cost-cutting and general efficiency effects that it has for the large organizations, too. Perhaps small business owners need some consulting to better understand what this is all about and what are the tangible benefits they will enjoy in the long-run, but from where I stand, I wanted to take a closer look at what such a system might look like and why it should be integrated with the existing Accounting / Accounts Receivable system. And this is what I found:

• It is in the Accounts Receivable module where you issue your invoices and keep the customers’ balances. Therefore, if you go one step further, you can develop Credit Terms policies and track them through your A/R system. When customer payments do not come in time, you need an automated system to classify your receivables based on their age and amount. Each customer must be characterized with the “worst” Open Item identification that their invoices have.
• The receivables need to be re-examined every day to see if their classification has changed (and thus, the customer’s classification has changed).
• All overdue customers must be reported in a “worst-first” order of appearance so that designated people (users) take some action.
• Regarding the action itself, the system must be able to propose which action is best suited for each case, based on customer classification and previous history. E.g. there is no point in calling back a bad customer which has denied payment; you’d better send a written notice and after that, proceed to legal actions. This and many more examples should be entered in a model database so that the system can propose “what to do next” for each case.
• For each action taken in the previous step, there may be a follow-up action required. Also, you might want to assign this follow-up action to a designated person, so that each officer takes ownership of a case (and you be able to monitor their performance)
• Now, because telephone is not the only way to communicate, a useful addition to the Collections system would be the ability to send bulk letters, emails and text messages. Sure, there are a lot of services out there that are up to the task, but all of them are expecting you to prepare a list of people to send to. You would probably use a spreadsheet to put all of your bad customers, classify them and then produce sub-lists, directed to the email service, the SMS service and the printing service providers… Too much trouble, when your A/R-Collections-CRM system could do it automatically, for you. Imagine spending just a few minutes of your time just reviewing ready-made lists and then act on them, with a push of button…
• When Credit Terms have been implemented in your organization, these can be integrated with the Collections process so that bad customers can be downgraded to a “worse” Credit Policy, while good customers can be upgraded. You see, the objective of the Collections Process is not only to collect the overdue amounts but also decrease the probability of the customer generating delays again in the future.
• When you are in a discussion with an old customer about new business, you need to be able to see their old behavior; this is surely a decision factor while discussing the new agreement. And what better source of information than your Collections module where previous history and behavior is (should be) recorded. In other words, the collections module purpose should not only be to enable the daily operations but also to collect “intelligence” about each customer, for any future use.

As a fan of integrated systems (the best-of-breed logic is of course understandable but I doubt of its cost-benefit for small and medium sized businesses), it is my opinion that A/R and CRM contain most of the information that one needs to build a solid Collections process and a Collections subsystem, closely tied with the rest of the Business Application software that you use. The benefits of such a new project will be enjoyed fast enough, especially in troubled markets.