If you are reading this, you must be seriously thinking about streamlining your debt collections process. If you would like to begin by knowing why an efficient collections process is important and how it can have an impact on your company’s cash flow & runway, please refer to Jason’s (of SaaStr) tweet and his related post on this topic.

From the various responses to the tweet that came from the founders, we found that a lot of them had their versions. After some Googling, I realized there was no comprehensive, definitive guide/playbook out there that can help you out to get started on streamlining your debt collections. So here we are! 

If you’re wondering why this playbook, let me establish my street cred. In my past 1 year, I have been spending a lot of time talking to 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), in my journey of building Growfin (AR Automation Software).

We realized during our conversations that teams were spending a lot of time and effort on solving cash flow and debt collection challenges - challenges that could be made easier with a tool like Growfin.

Also, realized we could compile the learnings from those conversations as a playbook which might be resourceful for startup founders after looking at the Jason tweet.

Disclaimer: This might be a long read. But it is for founders like me who have a hundred things to do and very little time to do it in. Hence, I’ve tried to be clear, concise and provide clear takeaways with it as much as possible.

Debt Collections on a B2B Startup context

Collections in a traditional BFSI context are about chasing payments. This could be a loan repayment 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 the rep 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 customers face in making a payment 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 CX right from the moment a customer signs the contract to when the money hits the bank and beyond.

For example: In the case of SaaS businesses, the collection cycle happens every billing cycle so the collector might have multiple touchpoints with the customer, probably every month. It's not just the AM or CSM's job to manage customer relationships. It’s also the responsibility of the collector.

Throughout this section, I’m going to assume the best of your customers. They love your service/product and have the clear intent to pay you but haven’t for any number of reasons. 

Delay in payment could happen because of many reasons, but here are some of the common internal reasons that could cause unnecessary delays,

1. Not sending the invoice to the customer on time
2. Not having the right billing information in the bill
3. No or wrong email address for the payer/billing contact
4. Billing amount or items are wrong
5. Not sending the relevant documents (like a purchase order or statement of work) while sending the invoice

If you look at the above reasons, those are some things that are easy to correct. But as a framework for best collection practices, it's all about sending the right information to the right person at the right time.

• A clean customer record and contact data
• Timely and personalized delivery of the invoice (Understand which customer wants what type of invoice and mode of delivery)
• Proactive collection follow-ups - Knowing to remind the right person at the right time with the right information

Having a clean contact/lead database isn’t just important for your sales and marketing team but also necessary for your collections team. From our learnings,

Now, what to do & how to do it?

It starts with your customer onboarding process. You need to ensure that

• You collect correct and necessary billing/payment information,
• You and your customers are transparent. Everything needs to have been communicated well and agreed to.

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 if needed
• Preferred payment mode (ACH, wire, Credit card, check, etc.)
• If it’s credit card auto-pay, 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)

This information is essential to keep the right person in the loop and also escalate in case of delinquencies or disputes.

Contract/Payment terms

• Billing terms (Recurring/Contractual)
• Frequency of billing (in case of recurring)
• Accepted payment terms (Net 15, Net 30, etc.)
• Any split invoicing (Milestone based/usage-based)
• Appropriate late fees calculation on delay

Other key points to note:

• No. of days after which the collector is contractually bound to reach out regarding due payments
• Contract details: Make sure the contract captures all details regarding payment deadlines(late fees when applicable), amounts owed, and payment methods
• System of record: Make sure all the above information (internal, external, and payment information) is properly captured and maintained in the system (CRM or ERP)
• Access control: Collector should have access to change or update contact information 
• Constant Update: Keep updating the records about contact information to reflect changes like a particular payer/POC leaving the company or an upgrade with different terms.
• Credit risk: Evaluate credit risk of customers at the time of onboarding and make sure they are creditworthy (might not be applicable for SaaS)

One of the obvious easy things to do and yet getting missed sometimes is to send the invoice as soon as it's generated, check if it's received & received by the right person. Also, validates that your data is up to date & clean.

There might be different formats of invoicing & modes of delivering the invoice to the customer based on the type & size of the customer, it's important we understand how the customer wants to receive the invoice. This saves a lot of time by not sending the invoice to the wrong place and the back & forth because of the wrong format.

Being proactive to deliver the invoice in the right format and mode could save a lot of time.

Some common modes of delivery

1. Email - Most Common
2. Upload the invoice in an Accounts payable portal (like SAP Ariba etc.) - Common
3. Physical copy - Rare
4. Generate the invoice in the customer portal - Rare

To whom & how does invoice delivery have an impact?

This works if your customers are large enterprises, sometimes with SMEs as well. Most large enterprises have a very clear process for their vendor payments. This means that by just ensuring that you are meeting your customer’s vendor Payment process requirements, your payment comes at the right time because the right information reaches the right person.

Your collection effort starts much earlier, sometimes even before an invoice is generated by maintaining a good relationship with the customer & having touch with them periodically. But for a startup, we advise that you be proactive in getting in periodic touch with the customer to understand the status of the payment upfront even before it's due & understand if there is any concern in it getting paid on or before due.

This helps you to maintain a good relationship & not be too pushy. Also allows you to get clarity on whether you will get the payment and the timeline of it. This brings more predictability to your company’s cash flow.
However, the key here is to maintain the balance of being proactive & yet not annoying the customer.

Hitting the right person at the right time with the right information

Here are some good practices & recommended cadence to follow on sending reminders & follow-ups on invoices before they are past due or just past due.

Beyond this, you can consider this a delayed payment and involve a collections strategy to collect from the customer. It’s important that the reminder emails should follow the same thread as the Invoice delivery mail along with all the required documents.

Some details on sending the right information 

If you are a pure-play SaaS, it’s mostly the subscription invoice with add-ons if they have purchased any or any expansion on the licenses that they have done. Example - Purchase of new seats/licenses for new hires in their team.

If you have a complex billing process like Paas or Iaas solution with usage or consumption-based billing or in the ad-tech space where you might have to show attribution, it's important that you have a document (Excel, In-product, PDF).

If you have a service (Professional services) element to your business or your business is primarily services, then it's important to track time and share the statement of work and/or timesheet with the customer.

If you are a business delivering physical goods, proof of delivery (POD) or bill of lading (BOL) is necessary.

There are going to be customers who do not pay on time & this is where a clear process/framework is required for your collector to accelerate collections on these past due invoices.   

Here is a simple framework you can follow to better manage your receivables and streamline your collection process efficiently,

• Have a snapshot of your receivables
• Collection strategies for different customers
• Optimal follow-up cadence 
• Tracker for managing your receivables & collection activities
• Key metrics for monitoring cash inflow & measuring collection performance

Before we get started on collections efforts, naturally we need to have a snapshot of where we are today wrt outstanding collections.

Here are some metrics & reports to look at the start of every day/week/month (based on your collections frequency) before you go about collecting,

1. Total outstanding/balance to be collected (across customers & invoices)
2. AR by Aging Buckets
3. AR by Payment Status

Before you start following up on customers with AR, it's key you have an approach/strategy for more efficient collections. By strategy, we mean who you collect first, how you collect(cadence & stakeholders involved & the level of involvement), and how you handle situations/objections, etc. 

Your collection strategy will vary based on who the customer is, hence it's important you prioritize your list of customers with AR & have different collections strategies for different priority segments

The traditional way of strategizing/prioritizing your customers is purely based on the value of an invoice or how big the customer is & also may be on the age of the invoice. But that approach has challenges as it does not capture the risk involved in collecting the payment from the customer,

1. Current status of payment to an invoice (whether there is a commitment to pay or is it disputed etc.)
2. The number of follow-ups & escalations it has taken so far
3. Past payment behavior by the customer - any potential delinquencies
4. Current credit risk of the customer
5. Relationship strength with the point of contact etc.
   

These risk factors heavily influence how easy or hard it is for collecting cash from a particular customer & also done well gives you better/accurate predictability in your overall cash flow. 

However, as a startup, it's hard for you to capture & look at all of these data points to prioritize. Hence from our learnings talking to multiple collection specialists, we have come up with a simple framework for prioritizing collection effort and also a simple tracker template that you can use to prioritize & track the status of your receivables. Though it might be perfect.

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/strategy you want to take for your collection efforts on a daily/weekly basis.

Initially, segment customers based on,

1. Value of the receivables 
2. Collectibility index - A calculated value that represents the risk of collecting that particular receivable/invoice from the customer. 

While value is straightforward(sum of all invoiced amount), for the collectibility index to be considered to segment your customers, find below factors you should consider for each segment, 

1. Age of the invoice 
2. Current status of the invoice (Promise to pay, Disputed, Escalated Invoice)
3. Number of follow-ups in your cadence in case of no response
4. Risk of the customer based on past payment behavior 
   a. Average delay in payment from this customer (from past payments)
   b. Relationship strength with the POC

Low Hanging Fruits

Low Hanging Fruits are customers & their AR that are a fairly low effort in collecting & will unlock your cash flow immediately. These are some of the invoices that you can immediately start following up with the customer.

How can you identify low-hanging fruits?

New invoices from low risk existing customers

Identify any high-value invoices that are just past due from

1. Customers or point of contact with who you have a good relationship with
2. Long term happy customers
3. Customers who generally pay on time (without much follow-up required, Low ADP)

Invoices with a response of promise to pay from a customer

Identify customers (or invoices) with a commitment of payment or promise to pay from the customer that is due today or very soon. A promise to pay clarifies that there is an intent in making the payment & also gives you clarity on when the payment arrives with a clear reason for the delay for payment first of all.

Action - Send a gentle reminder for the customer over email about the invoice past due.

Critical customers

Critical accounts are generally the ones that need more attention and also time/effort involved in collecting the cash from the customer. Because a non-payment from these customers has a high cash flow impact and also sometimes you are not aware of why there is a delay in payment. Not investing the right amount of time, effort & also including the right stakeholders might lead to potential delinquencies or bad debts.

How can you identify these critical accounts?

New customers

Any new customer with a past due invoice is critical because there is no established relationship with the customer yet & there could be potential delinquencies as we do not know the true status yet.

Action - Just being proactive in establishing a relationship with the customer & their point of contact is critical. Also being cautious of any potential delinquencies here.
Connect warmly with the customer & send a gentle reminder that the invoice is past due.

Invoices from existing high-risk customers

Existing customers who generally pay late or large enterprises require a payment process on their end which might create back and forth.‍

Action - Followups could be handled by Account Managers or CSMs in case of really high value or large enterprises as there is an established relationship there that could be tapped in.
In case of some initial follow-ups, an email from the collector keeping the AM/CSM in the loop (Over cc) could help in collecting.
In case of some initial reminder emails sent, a call to the customer’s finance team to understand the reason for late payment will help you get the real status or a commitment of payment on a particular day.

Aged Invoices with potential delinquencies (after multiple follow-ups)

Invoices that have aged (beyond 30 days or 45 days, depends on the nature of business) & have been followed up multiple times (over email & calls)

If there is no response from the customer for your emails & calls made or in cases where there is no solid reason for delay or commitment of payment

Action - Escalate these high-value invoices. There are a couple of levels of escalation that you can take based on severity,

1. Level 1  - Involving the AM or CSM into checking with the customer for the non-response or non-payment. Highlighting the number of follow-ups and potential delinquencies.
2. Level 2  -  Involving the CXOs or the founder. The founder getting involved or senior management getting involved in the collection process with the POC (Buyer contact, not the finance contact) will expedite the process.

In some cases of large enterprises, while onboarding the customer, you may get multiple contacts in case of payment escalation or resolving disputes (Escalation Matrix) Using that now to reach out to contacts.

Disputed Invoices

You got a response from the customer that there is an issue/dispute to make the payment. There could be multiple reasons for the dispute based on which way you act will vary.

Dispute type

Invoicing errors or issues  - Verify & correct them if there are any, relatively quicker to resolve & hence less risky.  This type is the most common type of dispute that arises.)

Some rare ones,

Implementation or Onboarding delays - Customers might have signed the contract, but there might be a delay in implementation or onboarding of the customer, in these cases the customer might not be comfortable paying for an invoice before they start using the service.

There might be long delays because of this based on the implementation & onboarding cycle, hence being proactive with your onboarding team (CSM, pre-sales, etc.) is critical to expedite this process.

Product or Service Issue - These types of disputes are critical as they delay the payment a lot until the product or services promises & issues are resolved. These lead to unpredictability in payments.

Long Tail Customer

These are customers whose invoice values are low and there is a delay in payment. In some cases, 80% of invoices might contribute to 20% of the revenue, which means there is a big long tail.

Following up on the non-payment of these long-tail customers is time/effort consuming & with low ROI.

Action - Automation on following up with these customers yet being more personalized will be valuable in saving a lot of time for your team. Reminders to low-risk customers (with good contact/relationship) will accelerate the collections here.

You could also consider shorter payment terms (Due period) to these customers to accelerate the overall collection cycle and reduce risk in collections.

Accounts to be reviewed

When you have these long tails of customers with high risks in collecting cash based on the relationship with the customer or the payment experience in the past, it's good that you think of options other than offering credit to these customers like a pay & use model.

If credits are being offered, then consider the credit risk of these customers to define the credit limit and also review whether these credits offered are collectable. Also, shorter payment terms will help you accelerate the collection cycle, reduce risk or identify delinquencies much earlier.

Sometimes you might have to take the hard call of terminating the contract or doing business with some of these customers if you believe the ROI on collections is turning out to be negative.

Now that you know which are all the customer segments that you can prioritize and focus on, here is a framework that will help you with the next best action that you can perform as part of your collection strategy based on the current status of an invoice/receivable of a customer from that segment.

On invoices without any response or clear status of payment

Based on our learnings from experts, we have put a chart that shows what actions you can do as part of your collection strategy when you are following up and not getting any clear response or clear status of the payment from the customer.

When a customer responds,

Based on the nature of the response, the next best action that you can perform will vary. 

You can categorize the response types as mentioned below, 

1. Common trivial excuses for the delay in payment, nothing serious. Matter of time in getting the payment
2. Cash flow issues on the customer end
3. Issue/Dispute on your end with the product/service delivered or on invoicing etc.

We have detailed below the possible actions that you can do for each type of response that you receive,

Common excuses for delay or queries and their respective corrective action

Capture commitment or promise to pay from the customer

For all the above excuses for delay,

Also, ensure the promise to pay date is reasonable & justifiable. Else, push the customer to accelerate the payment with any alternative options, example - if an invoice is pending for approval on their end from the POC/Manager who is OOF, a 1 or 2-month timeline for commitment is unfair which you could argue & ask for an earlier date.

Cash Flow Issues for customer

When you offer an extension of credit to a customer for a period, ensure that the collectibility from the customer is not an issue it's just a delay in payment (or short-term cash flow issue). The last thing you want is to offer an extension or more credits to high-risk customers.

Disputed Invoices

Delinquent customers, customers who neither pay for the product or service used nor do they respond to your follow-up emails or calls. They might be either dormant on product usage or sometimes be using or have used the product/service as well. 

These are rare situations in the tech startup world to see customers who are super delinquent that you need to take actions who are you going to recover that payment. It does happen rarely and if it has not happened to you, great. But knowing what actions you can do when such a situation arises is critical.

If your product or service with the customer is ongoing (and you see they are using it), when you sense potential delinquency (from critical customers) before they become delinquent, the first thing that you do is warn them about a potential termination/suspension of product/service & it's contract agreement if any.

If you sense the customer is still unresponsive to the warning, suspend their account (product or service) & let the customer know. This in general escalates the situation and makes the customer act as if they are actively using your product/service. 

If there are customers who you have sizeable invoice value that you think has an impact on the overall cash flow if it becomes a bad debt, consider using collection agencies or similar services(upfront factoring) to recover the bad debt for you at a certain percentage of the cost of the invoice amount. 

This is an option you can consider when you believe the invoice is not collectable or recoverable internally by you. At point engage with a collection agency and give the historic information and all collection activities performed by you to recover the invoice amount.

Last line of defense. 

This is an option you can consider when you have invested huge resources (time & money) to a customer who becomes entirely delinquent and the invoice value is really high & is now considered a bad debt, where the impact/cost of not collecting the amount is really high that legal route still has ROI. Have in mind that when you give a legal warning, be prepared for a legal charge to be filed which would involve the cost of engaging with a counsel, etc. 

Similar to account suspension, give multiple warnings on a potential legal action, and then if you are left with no choice then send a legal notice by engaging with a counselor. There are multiple counselors or collection agencies that help you recover bad debts.

The impact of a legal warning/notice has credit implications to the customer as well, hence contractually bound customers would generally respond and try to mitigate or salvage the situation before it goes to court.

Some key & recommended metrics for startups to measure their collection performance, 

• Total collected (month to date)
• ADP (average delay in payment)
• There are other standard financial metrics likes DSO & ARTR (Used across industries & enterprise size) that give you a better picture of AR.

Total collected (month to date) is the overall amount that has been collected in a month until a given date. This helps you measure your cash inflow trend over time. It gives you a picture of how much you have collected so far in the current month.

The Average Delay in Payment is the average time a customer ( or across customers) takes to make a payment from the time it is due for payment. 

This metric helps you to understand how long your customers take to pay and when you measure it over time, you will be able to understand your collections performance and whether it is helping reduce the delay in payment/ accelerate collections. 

Also, when measured for every customer you can understand, 

1. which customers are low risk(pay on time overtime) and which are high risk. 
2. Need for credit reviews/check while onboarding the customer
3. Arresting bad selling behaviors (with wrong credit, billing & payment terms)

Days sales outstanding is a metric that helps you understand how long is your sales stuck as outstanding, another way of measuring how long it takes to collect a certain receivable amount. 

The difference here is DSO does not care about which customer or invoice has been stuck or paid, from a financial standpoint, it helps you measure how much cash that is owed (receivable) is stuck for how long.

The higher the number the more the impact on cash flow and working capital management, it is going to be. From a benchmark standpoint, good v/s bad DSO may vary based on the type of business or industry. But a DSO under 45 (with Net 30 terms) is usually considered a good DSO.

DSO is the most widely measured metric for AR performance measurement by finance teams, it is applicable across industries and sizes. But it is a bit tricky when it comes to SaaS companies.

Now, these KPIs measured over time(trend) will help you understand the collections performance of your company.

Once you have figured out your collection process specific to your business, how do you go about operationalizing it?

Identify your needs upfront and choose a software that best fits your needs. For example- you might want to have better visibility in terms of your collector’s actions or a dashboard to track receivables. A software’s capability does not just stop there. It can help you prioritize your accounts based on your collection strategy, live tracking of receivables’ statuses, know customer disputes, also automate a lot of collection follow-ups & manual reporting, etc. 

Alternatively, we have put a simple template tracker for you to get a feeler & get started on operationalizing collections. A tracker gives you a trial of what you can do through it has serious limitations in automating or streamlining the process.  Download Sample Tracker

But as you grow, managing this tracker cleanly & updating it manually by different stakeholders & users can be a great challenge. Choosing the right software can save you from such shortcomings. 

Advantages of using the software are: 

• Provide you better visibility 
• Help you prioritize accounts 
• Track statuses of your receivables 
• Track customer follow-ups and responses

Based on the nature of your business & the type of customers you serve, define your different collection strategies

• Define your different customer segments for prioritization & categorize them in the tool or tracker
• Define your follow-up cadence for each segment from reminders to escalations.
• Define possible email templates or call checklists based on cadence
  

To operationalize your collection strategies, you can set them up as filters & workflows in the tool and automate some of the collection follow-ups based on different strategies.

• Align all the stakeholders (finance, sales & customer success) on the collection strategy and their role in it 
• Setup reminders/tasks using a tool to remind them of their action at the right time
• Train them on collection related communication with customers 
• Train them on the tool as well

Set up your dashboard to measure Collection KPIs. Using software can help you track your metrics in real-time & help you analyze with data. There are methods to calculate DSO manually like Countback Method, Quarterly Averaging Method, Annual Average Method, Aged Debt Method. The recommended method is the Countback Method. You can refer to this article on measuring DSO. 

It is key you measure your current DSO, ADP & also a trend of DSO & ADP month on month to measure how your collection performance has been over months/quarters.

Get on a free 30 min consultation call with us

I believe this blog gives you a simple yet detailed framework and a good checklist for you to operationalize it.

If you are looking for further assistance to streamline your collections and operationalize them for your business - we are offering a 30 min free consultation with our expert committee of finance folks who have been there done that multiple times, feel free to block our time.