Accounts Receivables Portfolio Strategy: The Modern Approach To Accounts Receivable Management

For B2B companies, accounts receivable continues to be among the top three tangible assets on the balance sheet. Despite this, accounts receivable as an asset is often under- managed, leading to significant cash being unnecessarily locked within your financials. The undermanagement or at times mismanagement of this critical asset not only hinders cash flow but can also strain overall business operations and growth potential.

Understanding the Impact of Internal Processes on Collections

Having processed millions of invoices, Kapittx’s data reveals a striking insight: 70% of collection delays are not due to customers’ unwillingness to pay on time but are instead rooted in broken internal processes. These delays can stem from various factors, such as invoicing errors, unresolved disputes, or a lack of coordination between departments. When thousands of invoices for hundreds of customers are managed using outdated spreadsheets and manual processes, the task becomes not only arduous but prone to errors. This inefficiency slows down collections and severely impacts your cash flow forecasting and financial planning.

The Need for an Accounts Receivable Portfolio Strategy

Accounts receivable portfolio management can feel overwhelming, whether you’re dealing with the total value of receivables, the number of invoices, or the diversity of customers. To effectively manage this vital asset, it’s crucial to break it down into more manageable segments—an approach similar to dividing a large problem into smaller, solvable parts. By viewing your accounts receivable as a portfolio of smaller segments, you can develop targeted strategies that optimize cash flow, reduce bad debt, and allocate resources more effectively.

Segmentation – Developing an Accounts Receivable Portfolio Strategy

Segmentation is the cornerstone of a robust accounts receivable management strategy. By categorizing your receivables into distinct segments, you can tailor your approach to each, ensuring that resources are allocated efficiently and effectively. Here are some of the key ways to segment your accounts receivables portfolio:

1. Unbilled vs. Billed Invoices: Differentiating between what’s billed and what’s not can help prioritize efforts and understand future cash inflows.

2. Aging Analysis:  Segmenting by the age of receivables (e.g., 30, 60, 90 days overdue) allows you to identify problem areas early and focus efforts where they are most needed.

3. Size of Invoices: Large invoices may require different handling compared to smaller ones, especially in terms of prioritization and follow-up frequency.

4. Financial Status: Categorizing invoices by their financial status in your books (e.g., cleared, pending, overdue) can provide clarity on cash flow expectations.

5. Non-Financial Status: Consider the operational status of invoices, such as those in dispute, on hold, or provisioned, to address specific issues impeding payment.

6. Concentration Risk: Assessing the risk of having a significant portion of receivables tied to a few customers can inform risk management strategies.

7. Segmentation by Business Unit:  For companies with multiple business units, segmenting by each unit can offer insights into performance and risks at a granular level.

8. Product View:  Analyzing receivables by product lines can highlight which products or services are contributing to delays or issues.

9. AR by Region or Territory: Geographic segmentation can reveal regional trends and allow for location-specific strategies.

10. AR by Collector: Understanding performance at the collector level can help optimize processes and improve outcomes.

Formulating an Approach for Specific Segments

Once the accounts receivables portfolio is segmented, the next step is to formulate a strategy tailored to each segment. This strategy should define the required effort, resources, and tools, as well as the necessary skills of the staff involved.

For example, consider Segment 1, which may consist of thousands of small, thinly capitalized but moderately profitable customers. For this segment, the strategy might include:

• High Volume of Automated Communications: Utilize automated, progressively stern collection letters or dunning notices.
• Frequent Collection Calls: Prioritize high-volume calls emphasizing the need for prompt payment to avoid service interruptions.
• Automated Credit Holds:  Implement order and shipment holds when credit limits or delinquency thresholds are exceeded.

In contrast, Segment 2 could include a few large, creditworthy customers who account for a substantial portion of revenue. The strategy here would be markedly different:

• Account Maintenance Focus: Provide supporting documentation promptly for any skipped invoices and send friendly reminders for past-due payments.
• High-Touch Customer Service: Engage in frequent account reconciliations and periodic face-to-face meetings with purchasing and accounts payable teams.

Each segment demands a different approach, from resource allocation to the level of customer interaction, which directly impacts the effectiveness of the receivables management process.

Strategic Considerations in Receivables Asset Management

When formulating a strategy for managing your receivables, several critical factors must be considered:

• Primary Objective:  Define whether the focus is on maximizing cash flow, minimizing bad debt, or balancing both.
• Customer Contact Strategy: Determine the type and frequency of contact—whether it’s through calls, collection letters, statements, or face-to-face meetings.
• Resource Allocation: Decide on the level and type of resources required for each segment, such as collectors, sales staff, or third-party agencies.
• Credit Holds and Security Measures: Strategize the use of credit holds and other security devices like guarantees or letters of credit to protect your assets.
• Tight Alignment with Sales: Taking feedback from sales especially to understand the sales situation with a customer. Aggressive follow-up with customers may impact sales strategy when they are pursuing a large deal.

Using a Collection Follow-up Matrix

A practical tool for visualizing and strategizing your collection efforts is the Collection Follow-up Matrix. This matrix allows you to categorize your portfolio segments and outline the specific approach for each. For instance, in a sample portfolio of 1500 customer accounts, segmentation based on receivables balance size could look like this:

• A Accounts (>$10,000): Representing 60% of the portfolio value, this segment might warrant at least half of a collector’s time to maximize cash flow.
• B Accounts ($5,000-$10,000): Controlling 25% of the portfolio, this segment would require significant attention, with about a quarter of the collector’s time allocated.
• C Accounts (<$5,000): These might only require monitoring for timely collection letter or dunning notice issuance and urgent follow-up on significantly overdue accounts.

By effectively segmenting and managing the accounts receivables portfolio, companies can optimize their cash flow, reduce bad debt, and make better use of their resources. The skills required for these tasks will vary depending on the segment, but the primary focus should always be on aligning the strategy with the company’s overall financial goals.

Conclusion
Managing accounts receivable effectively is not just about chasing payments; it’s about creating a structured, strategic approach that addresses the unique characteristics of your receivables portfolio. By breaking down the portfolio into manageable segments, developing targeted strategies, and allocating resources appropriately, B2B companies can unlock the cash tied up in their balance sheets, increase cash flow, and strengthen their financial health.

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