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Receivables Outsourcing

Originally published: December 2012


Just staying in the game is the primary focus of most companies today. Issues like cutting costs, downsizing, reducing debt, and unloading underperforming properties are at the top of every CEO’s "to-do" list.

No question about it, in one way or another, we're all facing significant challenges. Many companies are meeting those challenges head-on by implementing strategies that will help them continue to grow now, and strengthen their position in the future. Outsourcing A/R is especially effective in this regard.

Cash Flow is the Key

According to a white paper by the highly regarded New York accounting firm, Freed, Maxick & Battaglia, PC, a key message for any company operating in a recession is to "take immediate action to improve cash flow."

Lack of operating cash was the primary "cause of death" for many U.S. "dot-coms" in the early 2000s, and a lack of liquid assets (cash) has resulted in the demise of banks, financial companies, and weak organizations in the recent recession.

A company's receivables represent as much as 40-50% of their assets. As a result, aging receivables have a huge impact on cash flow. Managing those assets more efficiently is going to help you stay afloat during the current crisis. And, employing more effective systems now, will prepare you for sustained success in the future.

Overcoming Weaknesses

Many organizations are handicapped by inadequate A/R management software; ineffective payment and collection processes; and insufficient revenue cycle reporting capabilities. These weaknesses, together with a lack of resources to make the necessary improvements, limit the effectiveness of these firms in reducing delinquent receivables and making any major improvement in cash flow.

There is a way, however, to access state-of-the-art systems and “best practices” A/R management processes without using up all of your working capital. Smart use of an outside 1st party receivables collection firm to support, and even upgrade, your internal capabilities can improve your cash flow, as well as give you more control of your revenue cycle in the bargain.

4 Ways Receivables Outsourcing Can Make Your Company Stronger

  1. Improved Cash Flow. If receivables represent 40-50% of a company's assets, then turning those receivables into cash – as quickly as possible – will immediately improve the financial position of that company. Unfortunately, with the downsizing going on right now, it's becoming increasingly difficult for the Credit Department to focus resources needed to effectively follow-up on all past due accounts.
    • It is an accepted fact that consistent, friendly contact with your customers will bring your invoices to the top of their payment pile – and often, produce repeat business. But most credit departments just don't have the personnel to follow-up with every single customer.
    • Outsourcing collection of even a part of your delinquent receivables portfolio (say, the 80% of your customers that are non-strategic), ensures they will each receive regular contact. This will remind them to pay now, or at least keep your invoices on the top of the stack – ultimately getting them paid more quickly.
    • In addition to improving immediate cash flow, outsourcing offers long-term benefits. The consistent customer contact provided by the best 1st party collections providers improves customer satisfaction, increases repeat business, and trains your customers to pay on time going forward.
  2. Improved Control of Payment Cycle. Outsourcing 1st-party collections to an experienced firm will provide your organization access to:
    • Specialized collection management software. With collections as its core competency, the A/R outsourcing provider is able to focus on implementing the best in collection software applications. The outsourcing buyer has access to these systems without incurring the substantial cost of maintenance, upgrades, and personnel training.
    • Consistent, effective and efficient collection processes. Through its automated file management, scheduling, and recording capabilities, the provider can standardize, and add consistency and discipline to the collection process. This drives improved quality, increased customer satisfaction, accelerated collections, and a shortened payment cycle.
    • Robust, insightful reporting. The outsourcing provider’s software can accurately assess collection performance, and even identify weaknesses up and down your revenue cycle – passing this information along to you so you can make better receivable management decisions.
    • Access to best practices, well-documented processes, and accurate, insightful reporting increases your current control over the function, and provides the information you need for improvements in the future.
  3. Scalable Staffing. Outsourcing provides a scalable staffing model since the buyer organization only pays for additional staff “as needed”. The costs of acquiring, training and managing qualified personnel remain the responsibility of the provider. Thus, the fixed cost of taking on new personnel turns into variable costs, depending upon the exact requirements of the organization.
    • If existing A/R staff is used to address urgent cash flow issues now, little time remains for them to perform the value-add projects critical to future strategic growth. Outsourcing eliminates this juggling of priorities and helps your company to keep moving forward.
    • Many firms rely on temporary staffing when in need of more FTEs (full-time equivalents) for collection. While temp firms are good at providing headcount, they fall short in duplicating the specific collection and customer service skills receivables outsourcing firms consistently develop in their employees. Temp staff also lack the knowledge of the organization’s internal processes and culture that is absorbed by the outsourcing firm in the course of their engagement.
    • A scalable staffing model saves cash. No need to hire more permanent or temporary employees that will require training and managing, not to mention benefits. It also ensures that current staff can stay focused on strategic concerns. And, when business turns around, you will be able to quickly ramp up to handle new customers.
  4. Improves Overall Business Performance. Receivable collections outsourcing empowers credit department staff to move beyond managing day-to-day activities to effecting business outcomes.
    • This shift from tactical to strategic management boosts performance and accountability. It does so by allowing managers, and other internal personnel, to focus on monitoring and adjusting processes in order to remove impediments to payment, thus improving results.
    • Consistent, documented customer contact by the outsourcing partner can improve corporate accountability by identifying problems in the payment cycle (like consistently late mailing of invoices or billing errors), giving your staff the information needed for setting in motion timely resolution.
    • Financial transparency is also improved as a result of accurate reporting available through the outsourcing firm’s collection management systems.


Conclusion

As a vital component of the revenue cycle, efficient receivables collection brings in cash quickly – improving cash flow and working capital. Outsourcing can boost your collection effectiveness, as well as improve profitability by decreasing process and administrative costs, headcount, DSO and cost per transaction.

Outsourcing the 1st-party collection function may seem like a small step to take in wading through the chaos of the current economy. However, more efficiently managing all of your accounts receivable has the power to create huge gains to get you through the current crisis and guide you to future profitability.