Collecting accounts receivables (A/R) is the lifeblood of any business, but the global recession has placed tremendous pressure on business operations. Many are struggling to stay afloat while others have completely shut down operations, which makes A/R collection challenging.
A 2020 global study by CRIBIS Dun & Bradstreet revealed a deterioration in business customers’ punctual payments to their suppliers. In its June 2020 Asian study, which included Thailand, Taiwan, the Philippines, India, Hong Kong and China, Thailand showed the highest degradation rate on on-time payments at 15.4 percent, followed by the Philippines at 5 percent and Hong Kong at 3.1 percent.
On the other hand, in the late payments to over-90-days class, the Philippines posted the highest degradation rate — 6.6 percent — from 25.6 percent in December 2019 to 32.2 percent last June. This means 32 out of 100 business in the country were paying beyond three months, compared with India’s 16 and China’s 14.
We can already infer this because of the extended lockdowns imposed in the Philippines and their economic impact, which worsened the late payments of business customers to their suppliers.
With the difficulties faced by companies in collecting their A/R, radical approaches are needed to maximize the impact of collection efforts.
The first step is to apply customer segmentation, as different customers will have varying characteristics and behaviors during this time. You can do this based on credit risk, payment behaviors, strategic value to your company, impact of Covid-19 on your customer’s industry, statement from a third-party expert such as an accounting firm, bank statements showing insufficient balance, and data on how your customer pays its other suppliers.
With these features, you can classify your customers as “good,” “fair” and “poor” accounts. Good accounts are those customers in a strong financial position and that pose almost no credit risk; fair are those in a relatively good financial position and that pose low credit risk; and poor are those in a weak financial position and that pose considerable credit risk.
These segmentations can be further refined using analytics to assess and optimize your A/R portfolio. Optimization can be applied across the different stages of the collection and recovery lifecycle. With the limited resources of credit and collection departments, this would help evaluate and discover successful decision strategies on where to focus your collection efforts and which communication strategies to use.
One successful case using this approach is a leading utility company in India that increased its debt collection by 50 percent with predictive analytics, as reported on the website of WNS Global Services. The company “wanted to optimize collection processes to improve recovery and create strategies to manage customer write-offs more effectively.” Furthermore, a propensity-to-pay predictive data model for residential customers of the firm was created. Customer segments were prioritized based on propensity-to-pay scores and the amount of outstanding debt; and a rigorous cost-benefit analysis to streamline operational, financial and human resource activities was done for more focused costumer engagement.
These brings us to the next step in managing A/R, which is streamlining operations and processes. A comprehensive analysis of policy, insight, people, processes, tools, technology, data, management information, and data and strategy is needed to gain maximum operational efficiency. You need to monitor your A/R with key metrics for maintaining liquidity, such as accounts receivable turnover ratio, days sales outstanding, and accounts receivable ageing amongst other metrics.
You also need to revise your A/R policies and process, if necessary, as there might be changes in the method your company invoices your customers, the process outstanding invoices are collected, and the way transactions are recorded because of Covid-19.
Another step is to apply an omnichannel communications strategy by contacting the right customer with the right channel at the right time. Also, ensure that all channels are in scope, including SMS/Viber, digital direct API, email and mobile app, as well as LinkedIn messaging. Organizations that can adapt their communication strategies quickly to enable customers to autoresolve on omnichannel platforms will be the winners.
In the end, after all these approaches are applied, empathy should be at the core of their execution. All companies and individuals face an unprecedented crisis now. That is why we need to handle delinquent customers with utmost empathy: in the way we communicate, negotiate and resolve.
Showing empathy pays offs. If you do, companies will stay with you as your customer for generations to come. If you help customers during tough times, they will remember that and continue showing goodwill.
The author is the founder and chief executive officer of Hungry Workhorse Consulting, a digital and culture transformation consulting firm. He is a fellow at the US-based Institute for Digital Transformation and teaches strategic management in the MBA program of De La Salle University. He can be reached at rey.lugtu@hungryworkhorse.com.