B2B collections: Balancing efficiency and customer relations

When a business starts actively managing accounts receivable (AR) collections, it marks a critical turning point in the customer relationship, but it doesn't have to be the end. Recognizing that B2B payment delays often stem from operational inefficiencies rather than financial distress is key to fostering a consultative approach to B2B collections that helps maintain customer relationships and ensures consistent cash flow.

Recently, we sat down with Jill Parker, Sr. Director of Operations at Capital One Trade Credit, who provided a closer look at the AR collections process: when to start and what to avoid as well as how to maintain cash flow and improve customer relationships.

The challenges of B2B collections

“Handling AR collections in-house has ripple effects across your company’s operations and finances that vary depending on how well you manage the complex risk of extending credit to your customers,” Parker says. If not handled correctly, she adds, you may experience delayed cash flow, revenue loss and poor customer retention, ultimately limiting your company’s growth and success.

On the operations side, disjointed AR systems and high transaction volume combine to create complexity that can reduce efficiency and put pressure on your finances. On top of this complexity, you must balance the need to maintain cash flow with the need to retain customers.

According to Parker, additional challenges include:

• Credit Risk

Acquiring credit assessments of your customers is a lengthy and costly process that must be repeated regularly. To protect receivables, companies can buy AR insurance, but premiums can cost up to 0.04% of sales.¹

• Constrained working capital

Traditional AR processes can result in 90+ day delays in receiving payments, straining working capital and increasing the risk of non-payment. According to trade credit insurer Atradius, 55% of B2B sales are overdue,² and according to the Collection Bureau of America, collections may only recover 50-75% of invoice value.³ High inflation and AR factoring costs further impact profitability.

• Back-office inefficiencies

Manual AR collections processes—such as check processing, data reconciliation, sending timely invoices and handling billing disputes—can be time-consuming and inefficient.

• Difficulty measuring performance

Unless organizations take the time and effort to regularly monitor key performance indicators (KPIs) such as days sales outstanding (DSO), collection effectiveness index (CEI) and bad debt expense, they can never fully understand their program’s level of efficiency, effectiveness and risk.

• Customer experience friction

Outdated and cumbersome AR collections processes can lead to a poor customer experience, potentially driving customers to competitors with more streamlined and convenient payment approaches.

“Turning to a collection agency might appear to be an obvious step, but these agencies are rarely the best choice in a B2B relationship,” Parker says. “They often lack a nuanced understanding of the complex AR processes that come with B2B.”

When to enter B2B collections

The decision to move an account to collections is often triggered by several factors, Parker explains. These include a growing number of overdue invoices negatively affecting cash flow, a high volume of invoices creating challenges for follow-up and an undue strain on internal teams tasked with tracking and managing payments. “One common misconception,” Parker adds, “is that slow payments always indicate liquidity issues. Systemic delays in accounts payable can also be a significant contributing factor.”

Parker also noted, “Late-stage collections in particular often present unique challenges and require a nuanced approach”. In certain industries, for instance, accounts may enter late-stage collections due to project funding delays linked to project completion. These delays may not necessarily be related to liquidity issues. In such scenarios, creative solutions and effective engagement with the AP manager become crucial for successful collections.

Shifting to a consultative approach in B2B collections

According to Parker, “Understanding the customer's perspective and collaborative problem-solving are key.” Many businesses and AP managers need help making sense of hundreds of invoices and transactions, so simply sending a consolidated statement to your customer and hoping for the best is not enough. Viewing early-stage collectors as AR specialists creates a different and more positive relationship with customers—one of "advisor" rather than "collector."

Parker recommends these strategies for efficient and customer-centric collections:

• Start with clear invoicing

Set your customer up for success from the beginning by eliminating confusion and ambiguity.

• Leverage technology

Solutions that allow for payment by invoice, electronic payment application/remit advice and personal support for AP managers are key tenets of a strong trade credit program and subsequent collections approach.

• Build a communication framework

Make sure you provide your customers with clear communication and guidance throughout the AR process so that your organization is aware of any roadblocks to prompt payment and your customers understand the options available to them.

• Establish flexible policies

Your payment policies should provide as much flexibility as possible—with multiple payment options and terms that work for your customers.

• Prepare for long-term success

Continually refining your approach to collections will ensure success in the long run. Segment customers by financial needs, train your team to proactively address bottlenecks and monitor KPIs like DSO to assess performance and iterate on processes.

Do B2B collections yourself or leverage a trusted partner?

Managing AR collections can be a complex and time-consuming process. Leveraging a full-service order-to-cash solution partner can help streamline the full AR lifecycle—from credit decisioning and underwriting to billing, payment application and B2B collections services—helping to reduce an organization's risk exposure and time from order to cash.

According to a recent Forrester study, which surveyed over 300 enterprise financial decision-makers, organizations that choose to partner with a single-platform AR solution provider expect to see improved cash flow (63% of respondents), increased market share (63%) and increased visibility and control over AR (60%). In addition, 66% of respondents indicated that back office support—including collections—was an influential feature of potential AR solution partners.⁴

A trusted full-service AR solution partner

A trusted AR partner like Capital One Trade Credit can help you streamline processes, automate tasks and gain real-time insights into your credit program. This not only reduces the hidden costs, but also empowers you to optimize your trade credit strategy for maximum efficiency and profitability.

To learn more about the hidden costs of managing B2B trade credit in-house—and how the right AR solution can help keep them under control—download the brief.

 

 

 

                                                                                                                                                                                                                                       

¹Dun & Bradstreet, What Is Trade Credit Insurance?, accessed November 2024.

²Atradius, B2B payment practices trend, United States 2023, September 2023.

³Collection Bureau of America, Collection Agencies Fees & Rates, accessed November 2024.

⁴Derived from a commissioned study conducted by Forrester Consulting on behalf of Capital One Trade Credit, 2024.