High-Impact Strategy for Dunning Management: Increase Cash Flow And Reduce DSO
August 8, 2024Accounts Receivable and Cash Flow Challenges in Technology and IT Services Companies
September 18, 2024
Accounts receivable portfolio strategy is a modern approach to optimizing cash flow and reducing bad debt by segmenting receivables into manageable categories. Kapittx research highlights how internal inefficiencies cause 70% of collection issues. By analyzing receivables by invoice size, aging, region, and customer type, businesses can tailor collection tactics, allocate resources effectively, and improve financial outcomes. Strategic segmentation empowers companies to unlock trapped cash and enhance overall accounts receivable performance
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 When thousands of invoices for hundreds of customers are managed using outdated spreadsheets and manual processes, the task becomes not only arduous but prone to errors.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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FAQ
What is portfolio in accounts receivable?
Accounts receivable is one of the top tangible assets reflected on a company’s balance sheet, often representing a significant portion of its working capital. Like any asset class, accounts receivable consists of a collection of outstanding invoices, collectively classified as an accounts receivable portfolio.
Understanding Accounts Receivable as a Portfolio
An accounts receivable portfolio refers to the aggregate value of unpaid invoices owed to a business by its customers. This portfolio is managed strategically to optimize cash flow, minimize financial risk, and improve collection efficiency. Businesses assess their portfolio based on key factors such as:
- Invoice Aging – Categorizing receivables based on how long they’ve been outstanding (e.g., current, 30 days, 60 days, or beyond).
- Customer Credit Risk – Analyzing the likelihood of timely payments and identifying high-risk accounts.
- Outstanding Balances Across Customer Segments – Tracking amounts due from different customers, industries, or contract types.
- Collection Strategies – Implementing automation, payment reminders, and follow-ups to reduce overdue balances.
- Bad Debt Provisions – Estimating potential losses from invoices unlikely to be paid, ensuring financial accuracy in reporting.
Why Managing the Accounts Receivable Portfolio Is Important
- Optimizing Cash Flow – A well-managed portfolio ensures a steady inflow of payments, reducing liquidity issues.
- Reducing Credit Risk – Monitoring aging and customer payment behavior helps prevent bad debts.
- Enhancing Financial Planning – Businesses use portfolio insights to forecast revenue and adjust credit policies.
- Streamlining Collection Processes – Automation and structured receivables management accelerate invoice resolution.
By effectively managing the accounts receivable portfolio, businesses can improve liquidity, strengthen financial stability, and enhance operational efficiency.
What is the best way to manage accounts receivable?
Efficient accounts receivable management is essential for maintaining healthy cash flow, reducing payment delays, and improving financial accuracy. With Kapittx, businesses can automate and optimize their receivables process, ensuring seamless collections and reduced manual intervention.
How Kapittx Helps Businesses Manage Accounts Receivable Effectively:
- Automated Invoice & Payment Reminders – Kapittx ensures invoices are sent on time, with automated follow-ups, reducing delays in collections.
- AI-Powered Cash Application – Matches incoming payments with invoices using intelligent automation, minimizing errors and unapplied payments.
- Real-Time Reconciliation & Visibility – Provides a centralized dashboard to track outstanding invoices, customer payment behavior, and cash flow status.
- Multi-Channel Payment Processing – Enables businesses to accept and process payments across multiple formats, including wire transfers, checks, and digital transactions.
- Dispute & Deduction Management – Identifies short payments, deductions, and disputes, allowing businesses to resolve discrepancies quickly.
- Optimized Credit Control & Risk Analysis – Assesses customer payment trends, helping businesses reduce bad debt risk and improve credit policies.
- B2B Payment Integration – Allows seamless payment processing for business transactions, making it easier for customers to pay on time.
- Predictive Analytics for Better Cash Flow Forecasting – Uses AI-driven insights to project collection patterns and optimize financial planning.
By leveraging Kapittx’s automation and AI capabilities, businesses can accelerate collections, minimize outstanding receivables, and strengthen financial stability without the hassle of manual processes.
What is the best KPI for accounts receivable?
Tracking the right Key Performance Indicators (KPIs) helps businesses optimize their accounts receivable process and improve cash flow management. With Kapittx, companies can leverage automation and AI-driven insights to monitor and enhance their receivables performance effectively.
Key Accounts Receivable KPIs Kapittx Helps Improve:
- Days Sales Outstanding (DSO) – Measures the average number of days it takes to collect payments after an invoice is issued. Kapittx helps reduce DSO with automated reminders and optimized collection strategies.
- Collection Effectiveness Index (CEI) – Tracks how efficiently businesses collect outstanding invoices within a given period. Kapittx boosts CEI by streamlining the invoice-to-payment cycle through automation.
- Accounts Receivable Turnover Ratio – Indicates how quickly a company converts credit sales into cash. Kapittx enhances turnover by improving timely payment processing and reducing overdue accounts.
- Percentage of Current vs. Overdue Invoices – Measures how much of the receivables portfolio is current vs. past due. Kapittx provides real-time visibility and automated escalations to address overdue balances proactively.
- Average Payment Cycle Time – Analyzes the average time customers take to pay after receiving an invoice. Kapittx ensures faster payments with automated reminders and integrated B2B payment options.
- Bad Debt Percentage – Represents the portion of receivables deemed uncollectible. Kapittx minimizes bad debts by identifying high-risk accounts and improving payment tracking.
- Dispute Resolution Time – Measures the speed at which payment discrepancies are resolved. Kapittx streamlines dispute handling by automating deduction management and customer communication.
By leveraging Kapittx’s AI-powered receivables management, businesses can improve collections, reduce overdue invoices, and optimize financial performance with data-driven insights.
What is the ROI of a portfolio?
Return on Investment (ROI) in the accounts receivable portfolio refers to the financial benefit gained from efficiently managing outstanding invoices and collections. A high ROI in receivables means faster collections, reduced bad debts, and optimized cash flow, leading to improved working capital and financial stability.
How ROI Is Measured in Accounts Receivable?
ROI in accounts receivable is typically assessed by evaluating:
- Collection Efficiency – Faster payment collection improves liquidity and reduces overdue balances.
- Reduction in Bad Debt Losses – Lower write-offs increase profitability and financial stability.
- Operational Cost Savings – Automated systems minimize manual intervention, reducing administrative costs.
- Cash Flow Improvement – Faster receivables turnover ensures sufficient funds for business growth.
- Customer Payment Behavior – Improved credit control strategies reduce payment delays and disputes.
How Kapittx Boosts ROI in Accounts Receivable?
Kapittx enhances the ROI of your accounts receivable portfolio through automation, AI-driven insights, and real-time tracking. Key benefits include:
Automated Invoice & Payment Tracking – Ensuring timely collections without manual follow-ups.
AI-Powered Cash Application – Reducing unapplied payments and misallocations.
Predictive Analytics for Risk Management – Identifying high-risk accounts before they impact profitability.
Optimized Collection Strategies – Helping businesses accelerate receivables and reduce overdue invoices.
Lower Operational Costs – Eliminating manual reconciliation efforts through automation.
By leveraging Kapittx, businesses can significantly increase the efficiency, accuracy, and profitability of their accounts receivable portfolio, maximizing ROI while ensuring financial stability.
Anand Ramachandran
A quintessential CFO, Anand is a qualified Chartered Accountant with over 25 years experience in Internal Controls, Risk Management, Financial Planning & Analysis, Working Capital Management and Legal & Compliance. He has rich experience in leadership roles with leading multinational firms like Andersen, Standard Chartered Bank, Rabobank and Barclays. Prior to Kapittx, he led the turnaround of Techprocess, a leading Indian Payments Company, which was acquired by Worldline Group. As a co-founder of Kapittx, he is responsible for Product Development, Customer Success, and Go-to-Market.