Using Targeted Outsourcing to Increase Cash Flow
Outsourcing a Portion of Your A/R Collection Responsibilities Can Increase Cash Flow and Keep You and Your Customers HappyIf managing accounts receivable is your responsibility, then you’re most likely facing many of these challenges:
- Downsized departments
- Turnover of skilled and trained staff
- Customers consistently paying outside terms
- Reactive, rather than proactive follow-up on past due accounts
- Limited availability of A/R information
- Demands to improve cash flow
Credit and financial managers are not always comfortable with the idea of putting customer contact into the hands of a third party, even if the hand-off remains totally transparent to their customers.
Without a doubt, your customers are your company’s most valuable asset – without them, you wouldn’t exist. Will you lose control by relinquishing A/R management to an outside party? Are you risking the loss of customers by letting a third party talk to them about their payment habits?
Another common concern has to do with your second most valuable asset -- your staff. Will outsourcing mean they will lose their jobs? You’ve spent a lot of time training and growing their capabilities. Do the potential benefits of outsourcing really justify losing hardworking, loyal people?
These are all legitimate concerns. But outsourcing doesn't have to be an “all or nothing” proposition.
While it may make sense for some companies to outsource their entire back office A/R department, most companies aren’t going to be comfortable doing that -- and they don’t need to.
You can have it both ways. In fact, there is a growing segment of companies that are using A/R outsourcing as a sharply focused, precision tool.
Consider this real-life case study. A large subsidiary of a $40 billion multinational conglomerate (we’ll call them the A2Z Company) used outsourcing to help manage the challenges of a major consolidation of its financial operations in the United States.
A2Z Company’s Strategic Decision:
- Immediate influx of 6700 receivable accounts (worth approx. $2.7 million) that required handling and resolution, with an average age of >270 days past due
- No ability to add staff
- Clean up the one-time influx of past due accounts quickly and cost-effectively
- Manage future receivables with in-house resources
- Maintain a consistent message to customers when accounts are rolled to third party collections (The third party team needs to know what the 1st party team said and did.)
The subsidiary approached a reputable and experienced U.S. accounts receivable management firm with these challenges. The A/R firm recommended a 3-month clean-up project. It provided a cost effective treatment program that included:
- 8 FTEs including trained and experienced customer service representatives, team leader, clerical support
- A dedicated 800 number for inbound calls
- Direct access for A2Z staff, via a secure web site, to their A/R management system and all notes on the handling of each and every account
- Weekly escalation and status reports
- Statistical reports including aggregate data on disputes and account status by age bucket, emailed weekly to A2Z
- Weekly conference calls to discuss progress and suggested treatment modifications
- Ability to roll 1st party accounts, along with all notes, to the third-party collection division
A2Z’s Targets and Results
|Collect 40% of outstanding dollars||57% collected|
|Resolve 35%||25% resolved|
|Roll 25% to third party collections||18% rolled|
The outsourcing provider converted past due receivables to $1.5 million in cash, and resolved 82% of the dollars held in these receivables.
The cost? Just 48% of what A2Z would have paid in contingent fees for the same results in third party collections. A saving of $117,000! And, best of all, first party treatment helped strengthen the relationship with their customers. Happy customers, mean more sales and a very happy A2Z CFO.
Results like this are not unusual, if you’ve found the right outsourcing partner -- one with specific expertise in accounts receivable management.
And you don’t necessarily have to have thousands of accounts that require attention. A2Z’s provider also handles projects as small as 200 or 300 accounts per month, all with no long-term commitment required.
Facing any of these issues?
- Small dollar accounts falling through the cracks. Your internal staff needs to focus on key customers and larger balances. But that leaves small dollar accounts at the bottom of the pile and often they just don’t get called. All together, however, these accounts can represent thousands of dollars of potential cash flow. Outsourcing just the small-dollar portion of your A/R ensures that smaller customers get the attention they require to pay on time. It also frees your staff to focus on the 20% of your customers that create 80% of your revenue.
- One-time influxes of A/R accounts, such as credit sales from a newly acquired company. With acquisitions, there is often a short-term influx of unpaid balances that need to be reconciled. You may not know if the accounts were called, or what the possible reasons for late payment might be. A short-term outsourcing project can clean up the newly acquired portfolio, so you can collect or write-off the old accounts and then start fresh with new business.
- Periodic increases in credit sales, for instance, from seasonal business upswings. If your industry makes a large portion of sales right before Christmas, or during summer vacation time, it won’t make sense for you to hire and train extra collection staff that you won’t need the rest of the year. Outsourcing the excess work during peak periods can cover your needs for substantially less cash than hiring limited use staff. Also, the outsourcing provider has trained and experienced collection representatives just waiting for your project. You won’t have the added expense of down-time while you're finding staff and training them. And you won’t have to worry about turnover.