If you are reading this, you must be seriously thinking about streamlining your AR collections process.
If you want to know why an efficient collections process is essential and how it can impact your company’s cash flow and runway, refer to Jason’s (SaaStr) Tweet.
From the responses to the Tweet, I found that many had challenges.
However, after some Googling, I realized there needed to be a comprehensive, definitive guide/playbook out there to help you start streamlining your collections. So here we are!
If you’re wondering why this playbook, let me establish my street cred: From 2020 to 2021, I spent time talking to over 100 collections/AR specialists, AR managers, finance managers/controllers, CFOs, and Startup founders from early-stage to late-stage companies (from $1M to $1B ARR).
During our conversations, I realized that teams were spending lots of time and effort solving cash flow and AR collection challenges.
Also, I could compile the learnings from those conversations as a playbook that could help companies either in the starting or later stages.
Hence, I’ve tried to be concise and provide clear takeaways as much as possible.
Accounts Receivable Collections in B2B
Let’s take a step back: Collections in a traditional BFSI context are all about chasing payments. This could be loan repayments or credit card defaulters. The goal of the collections rep is to hit their target by collecting cash from the customer.
Most of the time, the institution and collection agents don’t care about maintaining the relationship, so they even resort to bullying/abuse to get their money back.
In B2B, however, collections are about having a healthy relationship with the customer & unblocking hurdles/challenges they face in paying for your product/service.
It’s an extension of the customer’s life cycle.
It doesn’t involve just chasing invoices but also setting up a streamlined process to collect payments and handle customer experience (CX) right from when they sign the contract to when the money hits the bank and beyond.
For example: In the case of SaaS businesses, collections happen every billing cycle, so the collector might have multiple touchpoints with the customer, probably every month. It's more than just the account manager's (AM) or the customer success manager’s (CSM) job to handle customer relationships -- it’s also the collector's responsibility.
AR Best Practices
Throughout this section, I will assume the best of your customers. They love your offerings and clearly intend to pay you -- but they haven’t for various reasons.
Payment delays could happen due to various factors, but here are some of the common internal reasons why:
- Not sending the invoice to the customer on time
- Not having the proper billing information on the invoice
- Having no email address or the wrong one for the payer/billing contact
- The billing amount or items listed on the invoice are incorrect
- Not sending the relevant documents (like a purchase order or statement of work) along with the invoice
If you look at the reasons above, it’s pretty apparent that they can be easily corrected.
However, when it comes to a “framework” of sorts for AR management, it's all about sending the right information to the right person at the right time.
You need to ensure the following things:
- A clean customer record and contact data
- Timely and personalized delivery of the invoice (Before that, understand which customer wants what type of invoice and mode of delivery)
- Proactive collection follow-ups (Understand when to remind the right person at the right time with the right information)
Maintaining Error-Free Customer Records & A/R Contact Data
Having a clean contact/lead database isn’t just important for your sales and marketing teams but necessary for your collections team as well.
From our learnings,
The biggest challenge startups/companies face in payment collection follow-ups is incorrect, stale, or there simply isn’t any contact information of the customer's finance team.
Lots of time is wasted because invoices end up in the wrong inbox.
Now, what do you do, and how do you do it?
It starts with the customer onboarding process.
You need to ensure that,
- You have the correct and necessary billing/payment information, and
- You and your customers are transparent. Everything needs to be communicated well and agreed to.
Here’s a checklist of everything you need to ensure that you have the correct information:
Billing Information of the Account
- Billing name and contact
- Billing address
- Payer contact: both email ID and phone number (for collection follow-ups)
- Point of contact for any redressals/disputes or escalations that could come up
- Preferred payment mode (ACH, wire, credit card, check, or even cash)
- If it’s a credit card auto-pay, you need credit card information (you can set up a form to collect the relevant information, or you can use a tool like Stripe to allow customers to do their onboarding themselves)
Internal Contact Information
- Account Manager
- Customer Success Manager (if any)
- Collector (if any)
- Salesperson (if any)
This information is essential to keep the right person in the loop and escalate in case of delinquencies or disputes.
- Billing Terms (Recurring/Contractual)
- Billing Frequency (in case of recurring payments)
- Accepted payment terms (NET15, NET30, etc.)
- Split-Invoicing information, if any (milestone/usage-based)
- Appropriate late fee calculation (upon delay)
Other key points to note
- The number of days after which the collector is contractually bound to reach out regarding due payments
- Make sure the contract captures all details regarding payment deadlines(late fees when applicable), amounts owed, and payment methods
- Make sure all the above information (internal, external, and payment information) is adequately captured and maintained in a system of record (CRM or ERP)
- The Collector should have access to change or update contact information
- Keep updating contact information records and reflect these changes ASAP. For example, a particular payer/POC leaving the company or a plan upgrade with different terms
- Evaluate the credit risk of customers at the time of onboarding and make sure they are creditworthy (this might not apply to SaaS)
Personalized (and Timely) Invoice Delivery
One of the obvious (and easy things to do), yet gets missed sometimes, is to send the invoice as soon as it's generated and check if the right stakeholder receives it.
This also validates that your data is up-to-date & clean.
There could be different invoice formats and delivery modes to the customer based on their company type and size. However, you must understand how they prefer receiving it.
This saves a lot of time since it prevents incorrectly sending invoices and avoids back-and-forths.
Some standard modes of invoice delivery followed by SaaS companies
- Email (most common)
- Uploading in an AP (accounts payable) portal, like SAP Ariba (common)
- Physical invoices (rare)
Generate and make available on a customer portal (rare)
Impact of Invoice Delivery
Keen attention to detail regarding how an invoice is delivered works if your customers comprise SMEs to large enterprises.
Most large enterprises have a straightforward process for their vendor payments. This means that by simply ensuring that you meet your customer’s payment process requirements, your receivables come at the right time because -- you know it, the correct information reaches the right person.
Proactive Collections Follow-Up
Contrary to what you may think, your collection effort starts much earlier, sometimes even before an invoice is generated.
It starts with good customer relationships and keeping in touch with them periodically.
Be it any segment your customer falls under, I advise that you be proactive in getting in touch with the customer to understand the status of the payment upfront before it’s too late.
This helps you bolster a good relationship and avoid being too pushy. It also lets you know whether you will get what you’re owed and its timeline.
This brings more predictability to your company’s cash flow.
However, the key here is to balance proactiveness rather than irking your customer.
Here are some good practices and recommended cadences to follow while sending invoice-due reminders and follow-ups before they are past due or only just.
Beyond this, you can consider it a delayed payment and involve a collections strategy to collect. The reminder emails must follow the same thread as the Invoice delivery mail, along with any related documents.
As you scale and your monthly invoices increase, you should look at tools to streamline AR tracking and collections follow-up automation.
AR Framework to collect overdue payments
Let’s face it: there will be customers who will pay on time.
Your collector needs a transparent process or framework to accelerate AR accounting on any past due invoice.
Here’s a simple framework to manage your receivables and streamline your collection process.
Before you start collections efforts, you must have a snapshot of your existing collections.
How can you get this?
Here are some metrics & reports to look at the start of every day/week/month (depending on your collections frequency):
- Total balance and total outstanding (across customers & invoices): Total balance is the sum of all your open invoices for the total balance. To calculate the total due, subtract the sum of unapplied credits and payments from the total balance.
- AR by Aging Bucket: The percentage of your invoices for which payment has been delayed between 1-60, 61-120, 121-180 days (and so on).
- AR by Payment Status: A label attached to each invoice to indicate whether it has been partially or fully paid, pending, or reopened.
- Flagged invoices by type: Deep dives into why an invoice has been flagged. A customer could have given a promise-to-pay (PTP), be at churn risk, or have product or service delivery issues.
- Current DSO: The average days you take to collect payment from your customers after an invoice is sent. Check what your current DSO metrics are.
AR Collection Strategies
Before you start following up with your customers regarding overdue, you must have an approach/strategy for more efficient collections. By strategy, I mean who you choose to collect from first, how you collect (cadence, stakeholders involved, and their involvement level), and how you handle unforeseen situations/objections.
Your collection strategy will vary based on the customer; hence, you must prioritize your list of customers with AR and have different collection strategies for different priority segments.
Traditionally, prioritizing your customers is purely based on the invoice value and age. However, that approach has challenges, as it needs to capture the collections risk involved.
Start by gathering the following information:
- Current invoice payment status (whether there is a PTP or disputed)
- The number of follow-ups & escalations (so far)
- Past payment behavior (any potential delinquencies)
These risk factors heavily influence how easy or hard it is to collect cash from a particular customer. It gives you accurate predictability in your overall cash flow if done well.
Collection Prioritization and Strategies
At the start of your day or week for collections, when looking at a list of customers with outstanding invoices, you can apply this simple framework to continuously prioritize and choose the approach you want to take for your collection efforts daily or weekly.
Initially, segment customers based on,
- Receivables Value
- Collectibility Index (a calculated value that represents the risk of collecting a particular payment from the customer)
While the AR value is straightforward (sum amount of all invoices), for the collectibility index to be considered to segment your customers, you can find factors below that you should consider for each segment,
- Invoice age
- Current invoice status (PTP, disputed, or escalated invoice)
- Number of follow-ups in your cadence (in case of no response)
- Risk of the customer based on past payment behavior
a. Average delay in payment from a customer (from past payments)
b. Relationship strength with the POC
Low Hanging Fruits
Low-hanging fruits are customers who require a relatively low effort to collect from (plus, it will unlock your cash flow immediately). These are customers you can immediately follow up with.
How can you identify low-hanging fruits?
- New invoices from low-risk, existing customers: Identify high-value invoices that are past due.
For example, these could be
- Customers or point of contact with whom you have a good relationship with
- Long-term happy customers
- Customers who generally pay on time (without much follow-up required, Low ADP)
Invoices with a PTP logged
Identify customers (or invoices) due soon who have committed to making a payment or promised to pay.
A promise to pay clarifies that the customer intends to pay and when you will likely receive it (sometimes, even an apparent reason for payment delay).
Pro-Tip: Send a gentle reminder to the customer over email about the invoice past due.
Critical accounts need more attention, time, and effort to collect since a non-payment from these customers has a high cash flow impact. Plus, sometimes, you need to be made aware of why there is a delay in payment in the first place.
Not investing enough time and effort or including the right stakeholders could lead to delinquencies or bad debts.
How can you identify critical accounts?
Any new customer with a past due invoice is critical because there is no established relationship with the customer yet, and there could be potential delinquencies.
Pro-Tip: Simply establish a relationship with the customer and their point of contact. Also, be cautious of any potential delinquencies here. Connect warmly with the customer and ensure that your first reminder is gentle.
Existing High-Risk Customers
Existing customers who generally pay late or large enterprises require you to follow a payment process they have set, which might create further back and forths.
Pro-Tip: Account Managers or CSMs could handle the follow-ups if the invoice is high-value. For large enterprises, you could figure out whether there is an established relationship you could tap into.
Note: An email from the collector keeping the AM/CSM in the loop for initial follow-ups could help. Or, if some initial reminder emails are sent, a call can be made to the customer’s finance team to understand the reason for late payment. This will help you decode the actual status or get a PTP from them.
Aged Invoices with Potential Delinquencies (post multiple follow-ups)
You will have to escalate invoices that have aged (beyond 30 days or 45 days, depending on what you follow), and your team has followed up numerous times (over email & calls).
Pro-Tip: Escalate these invoices. There are a couple of levels of escalation that you can take based on severity:
- Level 1 : Involve the AM or CSM to check with the customer for non-response or non-payment, highlighting the number of follow-ups and potential delinquencies.
- Level 2: Involve the company’s CXOs (CEO or CFO, for example) or the founder. Senior management or the founder getting involved in the collection process with the POC can help expedite the process.
In some cases, if you’re dealing with a large enterprise, you could pre-emptively get multiple contacts. You can keep this in mind during a payment escalation or dispute resolution.
Say you get a response from the customer that they cannot pay. There could be multiple reasons for the dispute, and how you respond to it should vary.
Take a step back and look at the dispute type.
- Invoicing errors or issues : Quickly verify and correct them if there are any. These are relatively quicker to resolve and pose a lesser risk. This is the most common type of dispute that arises.
There are some rare ones as well,
- Implementation or Onboarding delays : Customers may have signed the contract, but there could be an implementation or onboarding delay. In these cases, the customer may not feel comfortable paying before using the product or service.
- Product or Service Issue : These disputes delay payment until the product or service promises and issues are resolved. These lead to payment unpredictability.
Note: If there are significant delays, being proactive with your onboarding team (CSM, Implementation, or Pre-Sales) is critical.
Long Tail Customer
These are customers whose invoice values are low, yet there is a payment delay.
However, 80% of invoices might contribute to 20% of the revenue, which means there could be an extensive set of long-tail customers.
Following up with these customers is time-consuming and promises low ROI.
Pro-Tip: Automating personalized follow-ups with these customers can be valuable and help your team save more time. Reminders to low-risk customers (with whom you have good contact or relationship) will accelerate the collections here.
Accounts you have to review
When you have long-tail customers with high risk in collecting cash based on your relationship with them or have past payment data to go on, you could consider other options rather than just offering credit to them. For example, you could opt for a pay-and-use model.
If you offer credits, consider the credit risk of these customers to define the credit limit and review whether these are collectible. Also, shorter payment terms help accelerate the collection cycle, reduce risk, and identify delinquencies much earlier.
Sometimes, you might have to terminate a contract or cease doing business with some of these customers if you believe the ROI on your receivables could become negative.
Now that you know the customer segments you can prioritize and focus on, here’s a framework to help you with the next best action you can take.
For invoices without any response or clear payment status
Based on my learnings from experts, I’ve put a chart that shows what actions you can take when you follow up but don’t get a clear response.
When a customer responds,
Based on how they respond, you can take various steps.
But, to make it simpler, you can categorize the response types as follows:
- Trivial excuses for payment delay; these are nothing serious. It's just a matter of time before you get your payment.
- The customer is facing cash flow issues.
- Issues/disputes with the product/service delivered on invoicing, and more.
I’ve detailed the possible actions you can take for each type of response you receive.
Common excuses for delay or queries
Capture commitment or promise to pay from the customer
Pro-Tip: For all delay excuses, you should seek a PTP once you put down a phone or towards the end of an email thread. Agreed PTP dates put an onus on the customer to meet it.
Also, ensure the date is reasonable and justifiable. Otherwise, push them to accelerate the payment with alternative options; for example - if an invoice is pending approval on their end from a POC who is out of the office (OOF), and they commit to a 1 or 2-month timeline, it is unfair.
Here, you could argue and ask for an earlier date.
Cash Flow Issues for customer
When you offer a credit extension for a certain period, ensure that the collectibility is not an issue; instead, it is a short-term cash flow issue. The last thing you want to offer is an extension or more credits to high-risk customers.
Collecting Money from Delinquent Customers
Delinquent customers are those who neither pay nor respond to follow-ups.
They might be either dormant on product usage or sometimes be using it as well.
These are rare situations in which you see super delinquent customers that need you to take action to recover payment. It does happen rarely, and if it hasn’t happened to you, then great.
But knowing what actions to take when such a situation arises is critical.
Account Suspension Warning
If your customer is using the product, when you sense potential delinquency from critical customers, the first thing that you should do is warn them about a possible suspension of the product and the contractual agreement, if any.
If you sense the customer still needs to be more responsive to the warning, terminate their account and let them know. This, in general, escalates the situation and makes the customer act.
Bad Debt Recovery
If there are customers for whom you have sizeable invoice value and you think this will impact the overall cash flow, consider using collection agencies or similar services (upfront factoring) to recover it for you. It will be at a certain percentage of the total cost of the invoice.
You can consider this option when you believe the invoice is not collectible or recoverable. Now, engage with a collection agency and provide them with historical information and all your collection activities.
This should be the last line of defense.
You can consider this option when you have invested massive resources (time and money) in a customer who becomes delinquent and the invoice value is very high. The cost of not collecting the amount is so high that a legal route is the only option.
Remember that when you give a legal warning, you must file a legal charge involving the cost of engaging with a counsel.
Similar to account suspension, give multiple warnings on a potential legal action. Then, if you are left with no choice, send a legal notice by engaging with a counselor. Multiple counselors or collection agencies can help you recover bad debts.
The impact of a legal notice has credit implications for the customer as well. Hence, contractually bound customers would generally respond and try to mitigate or salvage the situation before it goes to court.
Key Metrics for Measuring Collections Performance
Some key and recommended metrics for companies to measure their collection performance include,
- Total collected (month to date)
- ADP (average delay in payment)
- DSO (day sales outstanding)
The total collected metric is the overall amount you have collected in a month until a given date. This helps you measure your cash flow trend over time.
The Average Delay in Payment is the average time a customer (or multiple ones) takes to make a payment from when it is due.
And, when you measure it over time, you’ll able to understand your collections' performance.
Also, when measured for every customer, you can understand,
- Which customer is low and high-risk
- Need for credit reviews/checks while onboarding the customer
- Arrest bad selling behaviors (with wrong credit, billing & payment terms)
Day sales outstanding is a metric that helps you understand how long your sales are stuck; it’s another way of measuring how long it takes to collect your receivables.
The difference here is DSO needs to consider which customer or invoice has been stuck or paid. From a financial standpoint, it helps you measure how long due payments are stuck.
The higher the number, the more the impact on cash flow and working capital.
From a benchmark standpoint, good vs. bad DSO varies based on the type of business or industry. But a DSO under 45 (with NET30 terms) is usually considered good.
DSO is finance teams' most widely measured metric for AR performance measurement, applicable across industries and sizes.
But it can be tricky when it comes to SaaS companies.
These KPIs measured over time will help you understand your company's collection performance.
Accounts Receivable Checklist: Operationalizing your Collection Process
Once you figure out your collection process, how do you go about it?
Choose the right software
Identify your needs upfront and choose an accounts receivable software that best fits your needs.
For example- you might want better visibility regarding your collector’s actions or a dashboard to track receivables. An accounts receivable software does not just stop there. It can help you prioritize accounts based on your collection strategy, track real-time receivables, understand customer disputes, and automate collection follow-ups.
AR Collections Tracker
Alternatively, I've created a simple tracker for you to get a feeler and get started on operationalizing collections. Download Sample Tracker
Managing this tracker cleanly and updating it manually via different stakeholders and users can be a significant challenge as you grow. Choosing the right software can save you from such shortcomings.
The advantages of using purpose-built accounts receivable software are:
- It provides you with better account and invoice-level visibility
- It helps you prioritize accounts based on AR aging
- It tracks receivables status and reasons for delay (some solutions even offer a “predicted pay date” insight, which lets you anticipate payments)
- It helps track customer follow-ups and responses
Collection Strategy and AR Automation
Based on the nature of your business and the type of customers you serve, define your collections strategy and automate your accounts receivables process.
- Define your different customer segments for easy prioritization and categorize them in the tool or tracker
- Define your follow-up cadence for each segment, from reminders to escalations.
- Define possible email templates (personalized) or call checklists based on cadences
Pro-Tip: To operationalize your strategies, you can set them up as filters or workflows in an AR automation tool, which will automatically follow up based on customer segments.
Align all your collections stakeholders (finance, sales & customer success) on the strategy and define their role.
- Set up reminders or tasks using an AR tool to remind them what they need to do
- Train them on collection-related communication with customers
Set up a dashboard to measure collection KPIs.
Using accounts receivable software can help you track your metrics in real time and help you analyze data.
There are methods to calculate DSO manually, like Countback Method, Quarterly Averaging Method, Annual Average Method, and Aged Debt Method. The recommended method is the Countback Method. You can refer to this article on measuring DSO.
However, an AR solution provides these insights in real-time so that you can keep track of your current DSO.
It is key you measure your current DSO, ADP & also a trend of DSO & ADP month on month to measure your collection performance over months/quarters.
I hope this blog gives you a simple yet detailed collections framework and a good checklist for you to operationalize it.