This vendor-written piece has been edited by Executive Networks Media to eliminate product promotion, but readers should note it will likely favour the submitter's approach.
While it's well understood that a healthy cash flow is the lifeblood of every business, a surprising percentage of CFO's across all industries don't implement an accounts receivable strategy. This is a flagrant missed opportunity. By adopting a strategy based on categorising and prioritising customers, you can increase the efficiency of your collections process and strengthen the health of your business.
The Effective Accounts Receivable Strategy: Prioritise, Then Conquer
One of the oldest and most inefficient methods for collecting debt is prioritising the follow up based on the aging report. Targeting customers based on each invoice's past due time might seem like a logical way of tracking down payments, but it's a flawed method, as it assumes that the most overdue invoices pose the most financial risk. While the aging report provides a handy snapshot of the overall health of a company's customers, it does little in helping CTOs, receivables managers, and bookkeepers shape a plan of action.
The key to an effective accounts receivable strategy is segmenting customers. The aging report assumes that each customer can be approached in the same way, but the reality is that no two customers are alike. They may pay late for a variety of reasons, and each requires a finessed approach based on the relationship and the history of payment.
There are a handful of ways in which you can segment your customers. Accounts receivable software can be helpful as you begin this process, as it allows you to easily view account age, average days late, current days late, and other factors such as company size and type of industry. While you may tailor a criteria that best suits your business model and payment schedule, each customer should be placed into one of three categories.
- Your top customers are those who routinely pay on time, or those accounts that are so large that you need not worry that payment wont be delivered
- Your average customers are those that require routine follow up-and valuable time-but ultimately, you know that they will pay you eventually.
- Your poor customers are those that exhibit one or morered flagson a regular basis. They require so much follow up and owe you so much money that you may consider dropping them as customers. In some cases the account may be too crucial to drop, but the customer causes you frequent headaches.
After categorising your customers, determine what percentage of your clients land in each category. This will give you an overall idea of how your accounts receivable is functioning, and can provide a starting point metric on which to improve.
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