Strategies for Collections Teams in a Crisis—The Frontlines of Cash Flow Q&A
It was a fortunate experience to host our friends from Snowflake, Slack, and Veeva Systems for a recent webinar: Strategies for Collections Teams in a Crisis—The Frontlines of Cash Flow.
As Credit and Collection leaders for their respective organizations, James Wallace, Steven Odell, and Michael Renner shared how they handle their day to day operations providing structure and encouragement to their teams, now all remote.
We’ve put together the top takeaways, as well as answers to all of the questions from the audience, even the ones we didn’t get to. Below you’ll find more information about specific tactics, KPIs, and vendors referenced by our panel.
We’ve organized the information into the following categories and summarized the key takeaways:
- Customer Health: Being compassionate with your customers is important, but don’t forget past patterns. If a customer typically doesn’t pay on time, then they most likely won’t do so in a crisis so prioritize your work accordingly.
- Credit Analysis: Customer retention is on everyone's minds, and that often requires flexibility around payments. However, without a background in credit this can feel like uncharted territory so we went through a few topics that people have raised. It’s important to perform your credit analysis during the sales process, and if you’re only starting now, then work closely with sales and account management to learn about customer health.
- Team Morale: Remember that your collections team is on the front lines of cash flow hearing about financial distress, so keep their morale high by celebrating the collections they do bring in.
- Process Changes: Credit & Collections teams are upstream in cash flow, you often know about potential issues coming up before other parts of the finance team. Avoiding surprises is generally a good thing in finance, so provide more frequent updates about your bad debt expectations, DSO changes, and collections forecasts.
- Customized Dunning: Striking the balance between keeping customers happy and collecting cash can be tricky. Automating the process can help teams of all sizes scale, and allow for more time on other business matters during a time of crisis.
Thank you again and feel free to reach out to our team via email@example.com if you would like to learn more about how Tesorio can automate a lot of this work for you and your team!
Being compassionate with your customers is important, but don’t forget past patterns. If a customer typically doesn’t pay on time, then they most likely won’t do so in a crisis so prioritize your work accordingly.
Do you make a judgment as to your customer's ability to pay as you decide your approach to delinquency? Also, in the event of severe delinquency, how do you think about shutting down their service?
A customer's ability to pay long-term should always be a factor in your collections and suspension decisions. When it comes to suspensions, always involve your sales team early in the process, this way they can reach out to their contacts and address the situation with different messaging than if it were to come from collections. This usually results in much quicker action by the customer and faster payment to avoid suspension.
On the other hand, if the suspension was going to occur prior to COVID-19, the pandemic shouldn’t give the customer a get-out-of-jail-free card. At the end of the day, we are running businesses and we are trying to manage our way through this pandemic as well. This is where A/R & Collections teams need to play bad cop, keeping the financial interests of the company top of mind.
We have a large volume of customers and some of the dollar amounts are in the single-digit thousands. How are you managing the right cut-off for manual contact of customers?
The best option is to automate collections processes for customers of all sizes. This allows you to then re-focus on the bigger accounts that you will then have the time to add in personal touches as needed when the daunting manual tasks have been removed from your day.
How do you manage strategic customers who are much larger organizations than you?
Analysts own these accounts globally, the focus is on building relationships with internal sales as well as customer's AP teams, project managers, etc. This allows for a much easier resolution when problems arise. For strategic partnerships that are of higher contract value, it’s important to establish more of a personal relationship. Try to engage with the decision-makers as early as you can with phone calls and personalized notes.
Customers that are closed or have furloughed their staff have requested extended terms. How are you managing this? And with regard to credit limits, are you offering extended terms?
Renegotiate contracts and decrease orders, which in turn will cause you to credit earlier invoices and reissue new ones. For the customers requesting 30-day extensions due to cash flow or processing issues, gladly accept those terms and lock in a promise to pay date. Continue to do what you can to help your customers through this time, make their success a priority.
Is it a bad look to threaten account suspensions during the current pandemic? As a SaaS company, suspending accounts is really the only tool we have with non-paying customers.
Continue issuing suspension notices over the past 30 days, and make sure to involve your sales team heavily both prior, during, and after issuing the notices to avoid any surprises.
Also, remember, if they were bad payers prior to COVID, they’re still going to be bad payers, if not worse. If you’ve reached out to sales and they’ve done their due diligence, then go ahead and move forward with this and don’t feel wrong doing so.
Customer retention is on everyone's minds, and that often requires flexibility around payments. However, without a background in credit this can feel like uncharted territory so we went through a few topics that people have raised. It’s important to perform your credit analysis during the sales process, and if you’re only starting now, then work closely with sales and account management to learn about customer health.
What changes have you implemented in current or past roles to make it easier for your customers to pay? Have you changed any policies?
Providing more options to pay is the best solution, there are many payment platforms that can make the collections process seamless for vendors and customers with one-click payment possibilities. One option is to increase the dollar threshold for which you will accept different payment methods (e.g. credit cards) without charging a higher fee. New payment plans and extending existing payment plans to some customers have also helped make it easier and more likely to receive payment.
Have you weighed and balanced the measurement of efficiency/net return of accepting credit cards with their higher transaction fee? Do you charge the credit card fee back to the customer?
The net return will be different for every business, but if it means receiving payment sooner or in a larger amount, then it is worth waiving these fees and not charging the customer in times like these. One suggestion is to mention this to customers early on as something offered during the crisis in order to help make payments easier and faster.
When it does come down to payment plans, how do you manage them? How do you go about deciding who is eligible for a payment plan from a credit perspective?
All customers are unique. Get on the phone to dig into the real situation of “I can’t pay right now”. What are their pain points? What does the business look like? In general, do your research thoroughly: go on Google, look up articles about the company, check out third party sources, go on LinkedIn, etc.
When you do create a plan, make sure it will work in the long term so they succeed as well, and that it’s not just structured to get cash in the door right now. The goal is to continue to get paid in the future too.
This should be a part of your teams’ process from the beginning. The collections team or collection leader should make the effort to introduce who you are to a new customer when they’re onboarded. This leads to more open communication so you’re one of the first to know of any changes in customer health.
How are you doing the credit analysis? What can you gather from the customer?
Utilizing a highly rated credit company has been effective within our panel’s organizations. Part of our panel recommended Dun & Bradstreet. They are now looking with more granularity in the analysis and the risk of their profiles or portfolios. Sometimes doing a simple calculation of a customers’ payment history can give you a lot of answers that you’d seek elsewhere... or you can run software that uses Machine Learning to do this for you automatically… sorry we had to :)
Getting to know your customers goes a long way, and if you’re not already, this COVID crisis is a really good time to build some goodwill with your customers. Help and support them with what your company can offer. Have an empathetic conversation with your customers, we’re all in the same boat.
One of our panelists has personally taken 50 calls in the last two weeks. Another has personally made 50 calls in the last two days. It all depends on your business, but just be in constant contact so asking for money isn’t the only thing you talk about.
How do you handle reporting to collections agencies during a crisis? When is the right time to do this, if at all? Who is best to use?
Set a certain dollar threshold early on for the time to send someone to a third-party agency. Only when a customer reaches that threshold, goes dark, and you’ve done everything you can from emails, phone calls, and the sales and account management teams exhausting their efforts - then you should proceed. Sometimes paying a flat fee for an external legal letter can be the best last step before reporting to an agency.
There are many agencies to choose from. When choosing one, if a third-party agency is asking for money upfront, move onto another one, it should be on consignment. Typical rates are 20-25% for the US, international rates increase to 35 to over 40%. Many agencies have an online presence, they make it simple to submit an account. There needs to be a collections process in place where you've exhausted all efforts to collect. If your collection agency is collecting on over 30% of your debtors, you probably need to reevaluate your internal collections process. When the Agency has exhausted their efforts there may be an opportunity to file suit which will include up front court costs of $400+.
Many of our customers are asking for extended payment terms. How do we maintain our viability to get our invoices paid while helping our customers get back on their feet?
Communicate as openly as possible with customers about this. Understand what your 'bottom line' is going into the discussion, and know where you can be compassionate. Have meetings with FP&A, Revenue, Sales, and AP on a regular basis. These meetings should provide health checks on customers and your business to allow you to better decipher where and by how much you are capable of extending terms.
How have you evaluated AR Insurance in the past? How do you determine if it's right for your business?
Members of our panel have evaluated and used AR insurance in the past, but it is typically applicable in very specific cases. Primarily, around high credit risk industries with seasonality and extended payment terms. Another case would be if your portfolio has a significant amount of high risk exposure and your company has a large appetite to take on that risk and expects to have losses.
Here is how they recommend analyzing your own situation:
- What is your current bad debt/write offs?
- What is your current cost of collections (Headcount, systems, contingency fees, etc.)?
- Are you employing the correct strategy for your portfolio?
Are you spending time and resources in areas that aren’t needed? This will require a deep dive into your portfolio to understand your customer’s payment habits. If 90% of your invoices that go delinquent pay by 15 days past due, is it effective to send notices prior to that mark? Think about time and resources wasted on sending notices and then having to respond to them. A lot of this can be automated too. One panelist shared the following anecdote:
"A good example of this is in 2008, originally we had our strategy to send delinquency notices at 3 days past due and disconnect notices at 10 days past due. After the electric market flipped upside down, we eliminated the delinquency notice and started sending our disconnect notice at 3 days past due. The reasoning was (a) as the price of electricity spiked, so did our delinquency and bad debt and (b) the 7-day savings per customer could be anywhere from $25-$100 per customer. Across 100,000 customers this proved to be beneficial as the disconnect notice moved us to the front of the line for our customers bill payments, as well as, savings to our bad debt should customers default. But we reached a point in 2009 as things started to settle down when we realized a 3-day disconnect notice was counterproductive. Too many notices, too many return phone calls and emails, almost half of my team’s day was spent talking to customers that were set to pay or already had. Our CFO proposed hiring additional heads to handle the volume. Instead, a simple change from 3 days to 5 days eliminated 75% of the 'unnecessary' communication and we were able to go back to targeting the proper collections audience."
Once you have reviewed these factors, you need to look at the cost of the premium of the insurance as well as the guaranteed rate or return. Some businesses will see the cost of the insurance as significantly lower than implementing and maintaining A/R & Collections teams and systems, plus it is a known rate of return on their delinquency and bad debt.
When getting a policy you should require higher coverage limits for specifically named large high-risk accounts. Underwriters will perform a credit review and analysis before providing their coverage amounts to you. They will typically require you to buy coverage for the entire portfolio, meaning the good accounts and the bad accounts. Be careful of losses, if you have too many in one year the next year you may not be covered or the premiums will be exorbitant and not cost effective.
One panelist suggested that these are the same things companies should be looking at when determining whether or not to use a 3rd party collections agency. What is their rate of return against the contingency fees they are charging? How soon/late do you refer accounts out in your strategy? Same principles, same data but two different routes a company could take in their collections strategy.
What are the best third-party credit agencies to report to?
How do you manage relationships with third party agencies that disregard the payment schedule of the executed SOW?
You and your agency should have a clear understanding of expectations. If they are not managing your portfolio under your guidelines then use another agency (remember the earlier comment about making sure you don’t pay money upfront). The best ones work with you to customize communication and understand how you want them communicating with your customers under each situation.
Remember that your collections team is on the front lines of cash flow hearing about financial distress, so keep their morale high by celebrating the collections they do bring in.
How do you motivate your teams to collect, when some of these conversations can be super challenging - do you provide detailed training on how to engage successfully?
Spend more of your 1:1 time with your analyst debriefing and preparing them for the tougher conversations now. For morale purposes, become more of a cheerleader. Look for the big wins that you can call out to the individuals, and then as a team collectively.
With regards to your team, what are specific tactics you're making sure they follow in their day-to-day workflows? Anything different than what you would otherwise do?
Empowering employees to be decision-makers in payment extension negotiations up to specific thresholds. If the automation or bandwidth is available, reach out to customers sooner, send a welcome letter or something prior to the due date (start the dunning process earlier before invoices are even due). Target the obvious industries if bandwidth is an issue. If your team’s bandwidth is limited, prioritize the transactions by the amount due in the period (month), then target the transactions that carry more weight against DSO (Days Sales Outstanding).
If you do not have a full-blown A/R team and are managing A/R with a 2-3 person finance team, how would you make yourself scalable?
1. Automate your dunning and reporting as much as possible (on average, one collector can handle 300+ accounts if the dunning process is manual, 1000+ if automated)
2. Develop meaningful training
3. Utilize contractors for short term goals
Do your team members have targets and bonuses associated with a successful collection?
Having a monthly and quarterly cash target tied into the company goals that can accelerate the bonus plans can aid successful collections. The panel recommends adjusting targets and then adding spiffs when team members go above and beyond as individuals, and as a team. Team morale should be a top priority during a crisis.
What metrics is your team usually tracking for the performance of your department, individual team members, and their productivity?
Look at the portfolio as a whole, look at the simplest form of 30 plus days past due as a percentage of the portfolio. What is that number you can live with as a past-due percentage? Other folks also target the overall portfolio’s % of invoices past 60 or 90 days.
One of our panelists shared that his company OKR (Objective and Key Result) is for less than 3% of the total portfolio to be greater than 60 days past due. They averaged approximately 2.5% on any given month prior to COVID. For the record, this is very good performance. They have adjusted the OKR to 7% in the COVID19 world, but they think they’ll be able to stay below that. His personal OKR is to have less than 10% of the total portfolio in greater than 30+ days past due, which they typically met prior to COVID19.
Typically, you can measure the performance of your collections team on cash collected as a percentage, forecast top-down and break out each collections’ territory. If you have set up a good process, then your collectors are only working on payment hurdles.
With metrics in place, you can then track each individual’s assigned portfolio against the portfolio-wide target. However, during tougher times, daily 1:1’s and weekly meetings should be the focus instead of purely looking at dollars collected. This type of ongoing communication will allow managers to gather the most data around their team’s performance and morale.
Credit & Collections teams are upstream in cash flow, you often know about potential issues coming up before other parts of the finance team. Avoiding surprises is generally a good thing in finance, so provide more frequent updates about your bad debt expectations, DSO changes, and collections forecasts.
What changes have you experienced in your roles during a crisis? How has your interaction with other parts of the organization changed?
Roles have changed from being 75% project-oriented to 75% transactional. Collections managers are back in the trenches talking with customers about the current and future state of the relationship side by side with the sales team. They have regular meetings with Revenue, FP&A, Commissions, and CFOs. They’ve accelerated collections steps to touch the customer sooner (15 days before an invoice is due). Phone calls typically will lend greater results in the process getting you access to the decision-makers. One panelist had over 50 calls in the last two weeks with customers, while another had 50 calls in the previous two days. It is a time in which your focus should shift to ensuring that your customers and your team are in a good space. Keeping your business running smoothly has become more about quality contact more than quantity.
What proactive measures are you taking now to make sure you get paid? What protective measures do you have in place to protect yourself against bad debt?
Prioritize your customers. Especially the ones with larger invoices, Make sure to spend the time early on to triple-check that the payment process is as easy as possible for larger accounts and that you have all of the correct details (contact, address, amounts, etc.). Check-in on customers consistently and remove any obstacles that you can predict them facing. For customers that are becoming unresponsive or have not paid efficiently in the past, add to your bad debt reserve accordingly (basically don’t count on payments from anyone you’re unsure about, this will prepare you for the worst).
How much pushback do you do when asked to use Ariba? Or no pushback?
There are certain costs associated with using these portals, and the benefits have outweighed those so the panelists have not pushed back on using Ariba, Coupa, or other similar portals.
Where does everyone store special billing instructions for portals? Does this live in a shared spreadsheet, or do you have fields for this within your billing system?
Sometimes you are able to store special instructions within the billing system and use specific tagging to keep things organized. It is also smart to keep a Google Doc or shared file that is common within your organization to store all portal info. This can include customer listings and all special billing instructions. Some people keep logins on this sheet too, but it is recommended that you use a password manager such as Okta or 1Password.
In the construction wholesale industry, we have credit insurance and the insurers will not extend the notification date. There are the usual collection steps, but have you tightened your belts or allowed an extension to terms with regards to continuing supply?
'Tighten your belt' by accelerating collection steps by as much as 15 days for customers that have not responded. Make things urgent if this has led to a better response in the past. Also, create a process to approve extensions that take into account your customers’ current and forecasted consumption. This will allow for a more seamless next step to your current process.
Can you tell us a bit about how you are channeling expectations up to management, what changes you're making to your models, and how you're adjusting your reporting?
The frequency has been adjusted as far as reporting goes, collections leaders are moving from standard month-end to bi-weekly check-ins. The entire finance organization—Revenue, FP&A, Commissions, Cash Flow, and Consumption (Transaction level Conservative Reserve model)—are working together daily to make sure forecasts are as accurate as possible and up to date with the rapid changes. The historical data used for forecasts is now based on the last couple of weeks or 30 days rather than the 6-12 month average used before. Aging forecast with payment plan/term extension adjustments have been consistently updated as well. The sales team has become a big part of reporting as far as gathering data around customer health.
Striking the balance between keeping customers happy and collecting cash can be tricky. Automating the process can help teams of all sizes scale, and allow for more time on other business matters during a time of crisis.
Have you revised all of your dunning campaigns in light of the recent situation?
Generally, customers aren't the ones to initiate contact with you to tell you there will be delays in payment or that they can't pay at all. Accelerating the timing of your dunning provides that opportunity for your customer to let you know there is something going on (think about sending a pre-dunning notice 15 days earlier than you normally would). Also, you could alter the language of your dunning to include more empathetic language letting your customers know that you are willing to work through any issues they may have. The main point is to drive a return communication plus letting you know earlier in the process there could be significant issues with that customer.
How quickly are your invoices sent to clients after they are produced?
This is called Invoice lag time—the amount of time between generating a bill and sending it out to the customer. This ranges from immediately to at most 5 days (the goal should always be within the first 24-48 hours). Taking a day and adding an extra step in your collections process upfront to make sure all of the details are correct with your invoice can help with reducing payment delays.
What is the flow of your dunning?
Many factors are involved with this. First, look at your historical results and figure out what your customers respond to best. For some, it may be phone calls, and for others it might be a pre-dunning email reminder that gets them to react. Put these customers into their appropriate buckets, and create dunning campaigns accordingly. If you are able to automate this process, it will give you the extra time to focus on personal touches and larger accounts. In the end, collections is a numbers game and some aim for as many touches as possible during a crisis.
How are you structuring emails to customers with overdue invoices? Since we have a small team we are looking to increase our response rate because we don’t have the manpower to stay on top of AR.
Be proactive, reach out, and introduce yourself to customers as soon as they sign up with your company. Build relationships with your sales team so you always have the correct contact information, and customers have yours. In a time of crisis, put yourself in the customers’ shoes. Utilize your sales team to check on customer health early. Then, when an account is past due vary the level of pressure and be consistent. Once again, put your customers into buckets and create templates, it will increase your productivity. Use a friendlier tone for those that are typically diligent with payment. Keep it the same for those that are normally overdue. Think about implementing a tool to automate the process, this will help your company scale and give you the extra time to focus on more pressing tasks.