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by SunGard AvantGard
Is the traditional approach of waiting 90 or 120 days before sending an invoice to a collection agency still the best way to manage A/R Risk?
SunGard recently did a study that looks at how companies can improve recovery by using statistical scoring models to help identify high-risk customers for earlier placement.
The premise of the study, performed in conjunction with two prestigious business-to-business collection firms, was as follows:
Most large companies have established a system allowing them to quickly identify customers at risk. These accounts are then proactively contacted, often before the invoice becomes due or very shortly thereafter.
Many of these firms, however, have not yet extended this strategy to determine when to forward risky accounts to a professional B2B (commercial) collection firm.
If these companies used a risk scoring method (via statistical modeling of their own payment history) rather than age-past-due to determine when invoices are sent to an agency, they would:
– dramatically improve recoveries;
– reduce DSO (days sales outstanding); and
– decrease bad debt expense.
The study included 189 participants across 19 primary industries.
Of the participants, 22% were from companies with over $5 billion in revenue, 18% fell into the $1 billion to $5 billion range, and 60% came from companies with under $1 billion in revenue.
Summary of Results of the Survey
- 96% of the respondents cited Age past due as the primary factor when determining which customers to place.
- Only 38% reported Risk as a factor in the decision to place a customer with a collection agency.
- 80% send placements to agencies at 90-120 days past due, regardless of the customer's risk profile.
- 82% place less than 5% of their A/R portfolio value with a collection agency.
- More than 80% cited Tracking Performance as their greatest challenge when working with a collection agency.
The challenges collection agencies deal with are almost a mirror image of those their clients’ face.
For example, claim quality is affected when claims are placed later than they should have been.
Incomplete files also affect claim quality. In particular, when the agency is not provided with access to the debtor’s collection history it must start over with the debtor, rather than ‘pick up’ where the creditor left off.
Companies that submit both electronic and paper formats create another difficulty for agencies. Simply put, paper clogs up the process. Data conversion adds an unnecessary burden of time and cost.
To deal with these challenges, progressive agencies are now participating in more innovative communication methods, taking advantage of portals and connectivity.
Solution to Effectively Managing A/R Risk
Automated collection claim processing, a recent development in A/R management technology, offers an effective solution to managing A/R risk.
This process facilitates the translation of claim data derived from the creditor’s A/R system into the agency’s collection software. It then standardizes feedback from the agency to the creditor.
The automated process contains three primary features:
- Automated Claim Placement
- Automated Agency/Creditor Data Flows
- Ability to Closely Monitor Status and Performance
Benefits of Automating Collection Claim Placement
The benefits associated with automating collection claim placement are related to timeliness, visibility and performance.
In terms of timeliness, claims are placed in accordance with the creditor’s corporate collection policy – not when the internal collector gives up or the manager decides tougher action is required. As a result, unnecessary delays in claim placement are reduced and the collection agency is able to start working claims sooner. This leads directly to higher recovery rates and fewer claims forwarded to attorneys.
To download the entire Market Study, visit Market Study – B2B Collection Agency Placement Strategies: Is Aging Out Still a Valid Approach? on the web and complete and submit the short form.
SunGard’s AvantGard is a leading liquidity management solution for corporations, insurance companies and the public sector. AvantGard provides chief financial officers and treasurers with real-time visibility into cash flows and increased operational controls around receivables, treasury and payments. AvantGard helps companies drive free cash flow and reduce inefficiencies across the EcoSystem of suppliers, buyers, banks and other trading partners. For more information, visit www.sungard.com/avantgard.
SunGard is one of the world’s leading software and technology services companies, providing software and processing solutions for financial services, higher education and the public sectors. SunGard is ranked 434 on the Fortune 500 and is the largest privately held business software and IT services company. For more information, visit www.sungard.com
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This information is provided by ABC-Amega Inc. ABC-Amega is a respected receivable management firm headquartered in the United States with more than 82 years experience in commercial receivable management. ABC-Amega is also one of the prestigious commercial collection firms participating in this study.