Global

Best
Practices

Finance effectiveness

Best practices
for accounts
receivable, credit,
and collections
management*

Overview

03

A. Eliminate barriers to payment.

04

B. Enhance automation of the remittance processing

function.

05

C. Implement a formal dispute management process.

07

D. Address distressed and delinquent accounts with

strategic proficiency.

08

E. Mobilize collections staff through specialization,

performance goals, and incentives.

09

Conclusion

10

*connectedthinking

About Global Best Practices

The PricewaterhouseCoopers Global Best Practices team researches and
writes about leading business practices in todays global marketplace.
Best practices are the means by which leading companies have achieved
top performance, and they serve as goals for other companies striving
for excellence. Best practices are not the definitive answer to a business
problem but should serve as a source of creative insight for business
process improvement.

Disclaimer: In providing the information contained in this best practices paper, PricewaterhouseCoopers LLP is not engaged
in rendering legal or other professional advice and services. As such, this paper should not be used as a substitute for
consultation with professional, legal, or other competent advisers. All information is provided herein as is.

Overview
Accounts receivable (A/R) assets are among the largest and most
liquid holdings on the books of most companies. A properly managed
A/R portfolio helps expedite cash flow and supports corporate cash
requirements. The ultimate goal of A/R management is to increase working
capital.
The A/R function consists of three principal operations: remittance
processing, credit management, and collections. Remittance processing
involves payment methods and automated processing. Credit management
includes communication of credit policies, credit checks and approvals,
and credit maintenance. And collections involves monitoring collection
techniques and technology and supervising and motivating internal and
external collections agents.
Customer service plays a key role in each of these processes. In fact, timely
collection of receivables depends a great deal on customer satisfaction,
turning it into an effective gauge of the importance A/R places on customer
service. To that end, leading companies incorporate a customer-focused
approach into each of the three basic A/R processes.

Finance effectiveness

Accounts receivable, credit, and collections management

03

A.

Eliminate barriers to payment.

Riding the wave of plastic opportunity is

McDonalds Corporation. In early 2003,
the metropolitan Chicago-based fast food
giant posted its first quarterly loss in 47
years. Determined to turn things around, the
company developed new product offerings,
implemented new technology, and introduced
new payment options, allowing consumers to
use debit and credit cards for purchases as
low as $1.

Slower payments mean less working capital. Some companies offer cash
discounts for early payment; others impose rigid penalties for late payment.
The motivation behind these terms and incentives is to encourage customers
to pay earlyor at least on time. A cash discount allows a customer to pay
less than the original sales price by remitting payment within a short time after
the sale. A cash-discount policy, judiciously applied, can reduce collection
periods, expedite cash flow, and cut A/R costs. The policy, most appropriate
in highly competitive markets, requires that companies establish procedures
to prevent unauthorized discounts and measure the impact of discounts on
profit margins.

McDonalds negotiated smaller fees with its

credit card networks based on transaction
volume. The new payment options shaved an
estimated seven seconds off each transaction,
allowing the company to serve 1.6 million
more customers per day in 2004 than it did
in 2003. The companys average sale also
increased from $5 to $7. In 2004, McDonalds
earned $2.3 billion, its highest sales increase
in 17 years.
Source: E-Commerce, Small is the New Big
by Debra DAgostino, CIO Insight,
January 6, 2006.

For consumer accounts, companies find electronic payment mechanisms

effective. Such mechanisms include monthly debits to bank accounts and
credit cards. Sales and collection efforts are usually more successful when
customers know they can make payment conveniently. Companies typically
offer a variety of options, including online payments, payment in person at
convenient locations, night depository or after-hours payments, payment by
telephone, prepayments, and installment payments.
The use of credit cards for payments up to $10,000 is an increasingly
prevalent practice with commercial accounts. When paid by credit card,
companies are reimbursed in two or three days, rather than the usual 30 to 45
daysor longer. With credit cards, back-end collection costs for delinquent
accounts are no longer an issue.
Many companies also partner with their larger customers to eliminate barriers
to payment. In these arrangements, management works closely with key
customer contacts to understand and help streamline ordering, receipt, and
payment processes. Finance personnel for both the supplier and customer
collaborate to speed payment processes, creating a value proposition that
benefits both parties. Such strategic partnering is more prevalent in industries
with customers who place high-volume orders regularly with the same
suppliers.

Finance effectiveness

A. Eliminate barriers to payment.

04

B.

Enhance automation of the remittance

processing function.

Efforts to reengineer remittance processing aim to collapse the time

span between the approval of an invoice for payment by a customer and
the receipt of that payment by a company. With automated remittance
processing, employee intervention is minimal. As a result, companies may
direct additional resources toward working with customers to collect payment
rather than processing paperwork.
On average, 70 percent of customers pay on time, while fewer than 10
percent pay later than 30 days past due. Technology frees additional time for
credit and collections personnel to identify and track accounts that require
follow-up. It also allows staff to analyze such variables as average days to
pay, days sales outstanding (DSO), and discounts earned for each account.
Lockboxes have evolved into a sophisticated tool to optimize receivables
management. Lockboxes represent a more cost-effective means of
processing payments than manual remittance processing. At the minimum
service level, a lockbox providerusually a bankprocesses wholesale
remittance items electronically. Automated workstations read the magnetic
ink character recognition (MICR) line of each check and deposit the amount
in the companys account. The bank then delivers all remittance information,
including envelopes, contents, and copies of checks, to the A/R department
for posting.
Leading companies also reconcile mismatched payments and deductions
as quickly as possible. Few companies have hit ratesthe percentage of
payments a system is able to match without employee interventionof 100
percent. A payment may not match an invoice for a number of reasons. For
example, a customer may pay less than indicated because of pricing errors,
shipping errors, damaged goods, freight charges, promotional allowances,
chargebacks, or miscalculated allowances. Known as deductions, these
adjustments can account for up to 15 percent of total A/R, depending on the
industry. For companies that receive a large volume of checks, even a small
percentage of deductionsresulting in unmatched paymentscan mean
significant staff time spent investigating and rebilling, as well as delayed
payment.

Finance effectiveness

B. Enhance automation of the remittance processing function.

05

Volt Information Sciences Inc., a staffing

company based in New York City, has
connected A/R software to a collections
application that displays up-to-date sales
transactions and payment information
combined with business rules for Volts
specific collections strategy. Collectors
know which accounts to focus on and which
customers can be allowed extra credit.
In just one year, Volts new and improved
collection process helped reduced bad debt
by $750,000.

Leading companies also employ deductions management software to

systematically monitor and control deductions claimed by customers for
invoicing, billing, shipping, and payment discrepancies. The software allows
companies to organize all data that needs to be collected to process a
deduction and to speed customer communications. Todays most advanced
deduction management applications provide web-based interfaces, allowing
collections staff to access all deductions information through a secure
web site. The software isolates problem receivables and enables users to
run reports based on deduction status, reason code, and internal owner.
Meanwhile, collections staff electronically documents and tracks customer
problems through all stages of the deduction resolution process.

Source: Making Collections Count by

Samuel Greengard, Business Finance,
March 2005.

Automating the deductions process can

help track where deductions originate
and eliminate the causes. For example, if
out-of-date price sheets are responsible
for a large number of disputes, providing
updated information could eliminate an
entire category of potential deductions.

Finance effectiveness

B. Enhance automation of the remittance processing function.

06

C.

Implement a formal dispute management

process.

Companies typically structure their formal

dispute management process in accordance
with internal company operations. For
example, customer-focused companies may
find it more efficient to dedicate specific staff
to handle all deduction and collection issues
for a particular customer, including disputes.
More process-oriented companies may prefer
to split functions, to avoid delayed collections
and overlooked deductions.

Leading companies build a formal dispute management process with a

supporting infrastructure to ensure timely and effective dispute resolution.
They route relevant documents related to the dispute to the source
department, establish firm dispute resolution time frames and escalation
procedures, determine root causes of problems, and identify solutions
to prevent recurrence. By taking these steps to resolve disputes quickly,
management can maintain a high-quality receivables portfolio.
While disputes often surface in the A/R department, A/R is not always the
appropriate place to solve them. In the order-to-cash process, any number
of departmentsfrom finance, credit, order fulfillment, or salesmay be
responsible for causing problems, and collaborative efforts with these players
are often necessary for satisfactory resolution. Leading companies ensure
that all relevant departments understand their roles and responsibilities in the
dispute resolution process.
Many companies also leverage credit and collections management
systems with electronic imaging and distributed work-flow initiatives to
share information about disputes with appropriate departments. With these
systems, companies may send images of the disputed invoice and relevant
order to the sales department if the dispute concerns a price discount. Or,
if it involves a shipping problem, they can attach images of the shipping
and remittance documents and route those to the logistics department for
resolution.
And while it is important to solve individual customer disputes in a timely
manner, many companies take the extra step to analyze root causes, so that
they may eliminate entire classes of disputes at the same time. In particular,
many now leverage newly integrated credit, collection, and customer
management technologies to gain a holistic view of the order-to-cash
process. By automatically capturing transaction data and running it through
preprogrammed parameters, companies may easily identify exceptions. And
because the technological infrastructure also enables companywide access
to information, different departments can easily work together to eliminate
root causes of disputes.

Leading companies ensure that they have the

right communication and work-flow infrastructure
to route relevant dispute documents immediately
to the source department for resolution.
Finance effectiveness

C. Implement a formal dispute management process.

07

D.

Address distressed and delinquent accounts

with strategic proficiency.

Collections laws in many countries are

rigorously enforced. Sound legal advice
protects companies from carrying out any
collections policies or procedures that could
provoke legal action.

Like sales, the collection process requires constant attention. Leading

companies do not wait for a customer to reach the point of financial
distress. Instead, they look for warning signs such as broken promises,
postdated checks, and changed payment patterns. If the customer is a
publicly held business, information about its financial viability is generally
available in annual and quarterly reports. But for privately held companies
and consumers, credit rating agencies are the only real resource for basic
information about a customers creditworthiness. Late bill payment is
the main sign of customer financial distresspossibly the only clue to a
consumers ability to pay. But business customers may show other signs,
including cash shortages, lower gross profit margins, consistent operating
losses, sporadic financial reports, or lack of information.
Many companies provide collections professionals with flexibility in handling
delinquent accounts so that they can find the most realistic payment solution.
An effective collection strategy that does not alienate potential long-term
customers may start with a willingness to renegotiate sales contracts or
payment terms, followed, if necessary, by tougher measures. Stricter policies
involve delivering future orders on a cash-only basis, stopping shipment or
service, delaying delivery, refusing additional orders, or refusing credit. Once
the past-due account is paid, normal product delivery and services can
resume.
Leading companies also segment their A/R portfolio according to risk.
When companies use the same collections approach for all customers, they
may overmanage some customer segments while undermanaging others.
Segmenting the account portfolio by high, medium, and low risk fosters
better management of A/R, allowing management to mitigate further risk
by addressing high-risk accounts first. To segment accounts accurately,
companies identify stratified risk factors and build them into their collections
management system. The collections staff may then easily identify priority
receivables and modify collections tactics for each customer. Staff can track
payment behavior trends and schedule collections activity accordingly,
anticipating customer performance and preparing for the outcome of that
performance.

Finance effectiveness

D. Address distressed and delinquent accounts with strategic proficiency.

08

E.

Mobilize collections staff through

specialization, performance goals,
and incentives.

Companies with high-volume, low-value

accountstypically consumer accounts
find predictive dialing systems effective.
These systems predict when a collector
will be available for a call, automatically dial
customer numbers, and cue only live voices
to collectors. A predictive system may be
reserved for slow-paying accounts or firsttime delinquent accountsand is usually
staffed by part-time or temporary workers,
allowing seasoned collectors to focus on
problem accounts.

Companies often struggle to recruit and retain effective collectors. In recent

years, the situation has become more critical as a growing number of slow
payers has produced a greater need for first-rate collections professionals.
In response to these ongoing challenges, finance departments are striving to
establish a high level of professionalism among their collections staff and to
encourage peak performance.
To this end, leading companies encourage specialization among collectors.
The automation of routine collection management tasks has freed time
for collectors to focus on special skills. Instead of taking the traditional
alphabetical or geographical approaches to organizing accounts for
management, collectors specialize in handling different segments of the
receivables portfolio, grouped according to business lines. This trend towards
specialization has led to greater efficiency for the entire collections process,
as well as better staff morale.
Collections staff are best motivated by attainable performance goals,
which combine company and department objectives. A common error is
setting goals beyond realistic levels, a practice that can lead to low morale,
absenteeism, and high turnover. Measures within each collectors control
such as the amount of money collected or a percentage reduction in collector
portfoliobetter reflect collector performance than DSO does because DSO
can change based on credit activity, sales activity, and market activity.
In an industry facing annual turnover rates between 50 and 100 percent,
companies are invariably seeking new ways to retain collectors with the right
skills. Effective performance incentives are usually monetarybonuses,
commissions, and awards. To sustain high motivation, companies reward
successful collectors within a week or two of goal attainment. And some
companies share performance results among collectors by rewarding each
team member for the results of the entire team.

Finance effectiveness

E. Mobilize collections staff through specialization, performance goals, and incentives.

09

Conclusion

The evolution of credit has left an indelible imprint on modern business.

Today, A/R plays a vital role in the overall health of a company; documented
evidence confirms that a well-managed A/R portfolio can boost cash flow
and expand working capital. Consequently, successful companies continually
seek new ways to improve their A/R function. They strive to improve the
entire order-to-cash process, eliminate barriers to payment, and offer
incentives to encourage payment whenever appropriate. This customeroriented approach positively affects not only the receivables portfolio, but the
entire sales process. Ultimately, companies may gain competitive advantage
by increasing their appeal as vendors and thus enhance potential for added
revenues.

Finance effectiveness

Accounts receivable, credit, and collections management

10

For further information on these and

other best practices, visit:
www.globalbestpractices.com
e-mail:
help@globalbestpractices.com
call:
Toll free: 1.800.223.0535
International: 1.813.351.6469

2007 PricewaterhouseCoopers LLP. All rights reserved. PricewaterhouseCoopers refers to PricewaterhouseCoopers

LLP (a Delaware limited liability partnership) or, as the context requires, other member firms of PricewaterhouseCoopers
International Limited, each of which is a separate and independent legal entity. *connectedthinking is a trademark of
Finance
effectiveness
PricewaterhouseCoopers
LLP (US). CI-CI-07-0521