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Collections is a Treasury Issue. Here’s How to Improve It.

  • By Ankur Bhandari
  • Published: 4/17/2018

(Ed. Note: Updated 4/17/18)

While days sales outstanding (DSO) is a commonly tracked metric in most corporations, it also tends to be an opportunity rich for significant improvements. This is partly due to companies’ inability to objectively quantify an ideal DSO state, correctly understand the economic costs of not achieving it, and make the effort to address the issue.

Here’s why this issue is so important to treasurers: In a low interest rate environment, the opportunity cost of idle cash seems low, but the benefit of a capital redeployment from moving operating cash for investment purposes often is overlooked. Streamlining collections involves process rationalization, education across the organization and sometimes, difficult conversations with customers.

Short-term measures

Realigning collections will almost invariably face significant resistance from the field. It is important for these colleagues to understand the strategic significance and leadership support. Start the effort with a conference call and email hosted by the business and financial leadership.

The project lead/collections czar needs to have a strong business background and a firm hand. It is unlikely that he or she will win any awards for friendliness, especially if changes need to be executed in a rush and need management support. The czar should be a senior executive rather than the collections team lead.

The collections team itself is an important investment opportunity. A mature team with deep understanding/relationships with customers can be far more valuable than small savings from offshoring, etc.

A reassessment of the quality of the team is usually a good first step. Start the hiring process early, since it usually takes a while to get people on board with the necessary communication, negotiation and account reconciliation skills. Moreover, there is a learning curve before efforts start paying off. It may even be worth overstaffing the team for an initial period to address longstanding issues and effect process changes while the rest of the team focuses on business as usual.

The first item to focus on is overdue amounts—especially if your system can identify chronic overdue payers. This can point to major relationship management, client and delivery issues in addition to process problems.

In cases where there is an asset-based lending facility in place, some receivables are more important than others—so reducing assets that don’t qualify for lending (e.g., long overdue receivables, disputed items or federal receivables in some cases), will yield significantly higher liquidity payoff than other assets that do.

Gaming the system

Often, customers will attempt to game the process. There are ways that collections can overcome this issue.

All too often, customers will hold on to a payment because a small part of the invoice is incorrect. Account management needs to insist that the amount of the invoice not in dispute is paid and address the rest. There are some countries like Germany where this is not the regular practice—but even in those instances we should consider issuing temporary credit memos so that the existing invoices are ‘correct’ and then negotiate the amounts in dispute. This is a very common problem and should be incorporated into contracts as well.

Some customers will insist that the clock restarts on the day they receive a correct invoice or when their internal teams agree the invoice is correct. This is a flawed argument, as the payment terms are essentially meant to cater to the time for such approvals/corrections. Customers need to understand the service provider is not in business of lending money.

A periodic report to the executive committee highlighting perpetual late-paying customers, their account managers and action plan summaries re-enforces management seriousness and a disciplined process of follow-through on commitments.

Regular collection calls with account managers/business heads relating to large overdue amounts also leads to a joint understanding of the challenges and corrective actions. Commitments made should be documented and tracked to closure to keep people accountable. These should usually be done twice a week or more depending on the context.

Ankur Bhandari advises on corporate finance strategy and transformation and served as the treasurer of Omnicare and BearingPoint.

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