Outsourcing receivables management

Receivables management includes all steps you need to complete to have your invoices paid. This ranges from assessing a prospect’s credit rating to agreements about the payment term, allowing a customer a credit line or checking if the invoice is paid by its due date.

If the invoices are not paid, the receivables manager will take appropriate actions. This includes enquiring about the overdue payment in the form of reminders by telephone and in writing. If this does not bring in the payment, the receivables manager may involve a debt collection firm or start legal proceedings.

Some companies involve an external administrative office to perform their accounting work. There are similar reasons for outsourcing your receivables management. Often, they will take over debt collection on your invoices, generally representing your company.

1. Your core tasks of manufacturing and/or selling will be leading to you. That is what you are specialised in. You will scarcely find time and energy to chase your late payers on a daily basis.
2. Your organisation is probably not designed for executing an efficient receivables policy.
3. You may not have enough manpower and expertise to send reminders to late payers in a disciplined manner.

1. Up-to-date general terms and conditions

Clear agreements with your customers are the foundation of effective receivables management. Are your General Terms and Conditions set out correctly? Are they still up to date? Some provisions are of a statutory nature, such as consumer loans, group debt schemes, bankruptcy, Company Continuity Act and extrajudicial debt collection.

However, legislation is subject to change, and some provisions in your General Terms and Conditions may have become obsolete in the course of time. And you are not always aware of this. An external partner is always aware of such weak spots. He will help you review and amend your General Terms and Conditions where necessary.

2. Good customer relationship

If your external receivables manager handles the follow-up on late payments, you know it is in safe hands. So you will not have any qualms about taking a new order without checking the customer’s bank balance. This will benefit your customer relationship. Credit management and customer relationship management (CRM), however, must be closely collaborating without one hampering the other.

3. Custom work: you determine the tone of voice

Outsourcing your receivables management means working with a fixed team of case file managers. They understand and respect your wishes. You determine the tone of voice in the customer communications. Depending on the type of customer, this may range from friendly to strict. The number of attempts to urge a customer to pay may also be set in advance depending on the type of customer.

4. Financially healthy cash flow based on shorter DSO

Days Sales Outstanding is a rate that indicates how many days an invoice is on average outstanding before being paid. DSO is calculated by dividing your total balance outstanding by your average daily sales.

The development in the DSO is a key indicator. If the DSO increases, you are not doing well. This indicates you give your customers some financial leeway without being compensated in the form of interest. You are receiving your funds slower, and may not have the capital for additional investments or cover for disappointing developments.

A higher DSO leads to negative cash flow because your expenses exceed your income. This reduces your working capital, which may be a long-term risk to your company’s financial health.

Conversely, if the DSO is decreasing,  your customers are paying quicker. A shorter DSO leads to a positive cash flow, because the difference between income and expenses is increasing.

5. Continuously monitoring credit ratings

Screening a customer’s credit rating is not a one-off task. Your customer’s solvency can fairly quickly plummet due to a wide range of circumstances. Continuously monitoring credit ratings is something to leave to the specialists. They have a wide range of sources and are able to correctly interpret financial documents such as annual financial statements. Outsourcing such continuous monitoring will save time and prevent unpleasant surprises.

6. Extra pressure on late payers

A professional receivables manager has accurate and up-to-date information on a company’s financial health available at any time. This is crucial information to determine focus and priorities.

With its company database, Graydon has an additional pressure instrument to make a customer pay. After all, if a late payer is not fulfilling its obligations, this is reported in the database, which means risking a lower credit rating.

Transferring from a fully internal receivables management process to an external party is not necessarily challenging. Transfer by completing the following 4 steps:

1. Make an inventory of your receivables. You should be able to do this based on a CRM report.
2. You consult with the external receivables manager about the reminder process and tone of voice. Listen to their best practices for input.
3. The receivables manager monitors the invoices. He or she will do all that is necessary to collect the invoices and remit the amounts to your account.
4. You will frequently receive reports setting out the results.

The cost of receivables management may vary. For individual case files, a fixed cost per case file may be charged, or a commission on the amount to be collected. This is generally based on the ‘no cure, no pay’ principle. Amount not collected? No charge.

The cost for continuous receivables monitoring through an external partner is based on concluding a contract before the start of the work. The number of customers, amount outstanding and average age of the receivables portfolio will be key factors in the cost. Please study the details. It is possibly better to outsource than incur all cost (personnel, hours, letters, etc.) for following up on unpaid invoices.