Automated Collection May Be The Key to New Cash

Though little known, Goldstein Golub Kessler is a huge accounting and consulting firm with a myriad of practices. One of these practices, Treasury Consulting, focused on helping treasurers and chief financial officers manage their payables and receivables in such a way as to squeeze more cash out of the balance sheet. In this assignment, I worked with practice manager Robert Jaffe to create an article on automating the accounts receivable process and increase cashflow to a middle market clothing manufacturer. Though the concept of automating the collections function is dated, the underlying principles regarding collections management remain germane.

David R. Evanson

Privately Published, Spring, 1995

The reality is simple. Moving information electronically is faster and more flexible than any other form of dissemination. When this theory is applied to the collection function, the benefits are quite tangible, namely, new cash.

Our client, a middle market clothing and textile manufacturer, provides a case in point. Like many companies, this one was looking for new cash, and suspected there was some to be found within the collection procedures for its 3,000 accounts. In addition, the firm wanted to avoid the $200,000-plus annual expense for added personnel that would be required to take on an additional 8,000 accounts that were being factored.

The Best of Intentions
Our client was organized, and doing as well as could be expected with a manual system. However, the reality of the situation was that their way of doing business adversely affected the bottom line. Herezzs a sampling of how the four analysts, seven collectors, and one file clerk performed their task.

Collectors searched weekly printouts of the aged trial balance for past due accounts. Upon finding overdue accounts, collectors entered the names on their desk calendar. These names formed the daily list of files to be retrieved by the clerk for the collectors to call. Each collector wrote the details of their daily follow-up calls and put their report into the file for review by the analysts, who in turn checked the quality and consistency of the collectorszz performance.

Within this framework were hidden and not so hidden costs. First, the time alone that it took the collectors to search for overdue bills, schedule the calls and have paper files physically retrieved by a clerk was worth the equivalent of a full-time staffer. More important, the paper shuffling, plus the manual note taking caused the company to consistently miss — by some 25% — its objective of 30 calls per collector per day. And finally, without doing a special analysis of performance, management was unable to monitor the days sales outstanding (DSO) performance by collector.

We found delays that could be eliminated if the right system was installed. For example, there was a 10 day grace period before invoices were considered past due. There was another 10 days allowed after a promise to pay was made. In addition, there was three and a half days of lag, on average, introduced by the fact that the starting point for the whole system was the aged trial balance, which was produced only weekly.

We recommended a number of possible solutions but placed the greatest emphasis on wiping the slate clean with automated collection software and hardware that would easily link with the existing accounts receivable system. Itzzs difficult to characterize what these recommendations would do in a few words. However, itzzs safe to say that when implemented (the analysis was just recently finished), our clientzzs collectors should be able to make 40% more calls per day. And we project that DSO, instead of 60 days, could reasonably be reduced to 54 days. Further we believe that our recommendations may lead to a 15% reduction in bad debts. Herezzs why results like this could be achieved.

First, different strategies and protocols can be applied to each class of customer. Under the manual system, collectors tended to use the same strategies and protocols for all classes of customers. By automating, the company can apply collection protocols that match the payment behavior, and the importance of each customer class. For example, the smaller customers will be handled more by automatic faxes and letters with pre-set messages. This frees resources so larger chains can be handled with personal contact, which is generally more effective. And because the protocols can be adjusted, the follow-up for these customers can be tailored to meet their past payment behavior. As a result, what were once reminder, (or what customers call “harassment”) calls — “When are you going to pay?” — will be transformed into goodwill calls — “We can see from past experience you will be paying your invoices shortly, is there anything other information from us you require?”

Second, the manual process of identifying overdue bills will be eliminated. Collectors will no longer have to hunt through the aged trial balance to find late payments, a process which introduced a three and a half day lag. With the software we recommended, the list of accounts requiring calls the next day — some as little as just one hour overdue — will be downloaded to the collectorzzs terminal the previous night.

Third, the process of checking for payment prior to initiating contact will be eliminated. To avoid the embarrassment of calling customers who have already paid, our clientzzs collectors spent valuable time each day seeing if payments had arrived since the aged trial balance was prepared. However because of the direct link between the accounts receivable data base, and the collection system, collectors will be fed only genuinely late accounts for action.

Fourth, the time and labor intensive process of recording conversations will be eliminated. Since many customers give the same response when asked for payment, such as, “next week,” or “the check is in the mail,” the software allows these remarks to be recorded with a single keystroke, in addition to offering options for logging less generic or more complicated situations. And again, because the software tracks payment behavior, the collector can adjust the follow-up based on the response they are given.

Fifth, the need for analysts to review files and monitor performance will be eliminated. With collection protocols tailored to the companyzzs specifications, the software will lead the collector through the proper series of collection steps based on customer class and response to previous inquiries.

Sixth, the process of generating and disseminating reports about service problems for the sales department will also be eliminated. Since most customer service problems fall into two or three categories, the automated collection system can easily generate and distribute to sales a daily record of service problems by account, with subsidiary reports for special or unusual cases.

Seventh, individual collector performance will be easily monitored. Instead of initiating a special study, management will be supplied daily with reports showing collector performance by dollar weighted DSO, call volume, customer class, among other variables.

The Bottom Line
Items two through five above alone will save our client $40,000 annually. But the real dollars come with the potential reduction in DSO. By making some policy changes, now achievable because of staffzzs reduced paperwork burden, and utilizing the speed that automation offers, we calculated that our client could reduce DSO by as much as six days. This decrease translates into $93,000 of reduced borrowing interest annually. Perhaps most important, the company will now be able to absorb the additional 8,000 accounts without any increase in staff — therefore eliminating the need for more than $200,000 in personnel expenditures. The total return over three years? More than $1 million reduced costs and eliminated expenditures.

Naturally, these gains must be measured against the costs. In this case, they are really quite minimal. Specifically, the 11 PCs, collections software and local area network were just $50,000. Programming time and testing to establish the link to the accounts receivable database is a day and a half. Training is two half days at the most. And the time required to download information from the accounts receivable database to the collectorzzs terminals, about 2 hours each night, is easy to justify in light of new cash that would be created each and every year.


Bob Jaffe is Director of the Treasury Consulting Group for Goldstein Golub Kessler & Company, P.C., New York City, the 19th largest accounting and consulting firm in the U.S. Seventy-five percent of the Fortune 500 and middle market firms that Mr. Jaffe consults to are not audit or tax clients of the firm.

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