Accounts Receivable performance is a great indicator for the health of a business. A strong portfolio tests the entire business from manufacturing through payment application. It generally means our products or services are delivered with quality and, more importantly, our customers pay on time. But on the flip side, a weak portfolio speaks a much different tale. A tale of unhappy customers, less access to working capital and missed financial targets.
Low Customer Satisfaction
AR is the catch all for customer issues. Since most post sale communication comes from the O2C process, customers are apt to contact their AR specialist to resolve their issues, forcing them to become facilitators rather than collectors. Every point where the business comes into contact with the customer creates an opportunity for customer satisfaction. Confused processes such as multiple business units or multiple lockboxes increases frustration with interaction. As the frustration builds, the customer disputes more and pays later, until they reach a breaking point and decide to find a new vendor.
If customers are unhappy they will pay late. I think that point is pretty clear. The quality of what we sell (products or services) must be on par with the expectations set during the sale. If not, the door is wide open for the customer to pay late. Days Sales Outstanding (DSO) is a common finance measurement for AR performance. While DSO has a few problems, mostly in the variables used in the calculation, it can be a good barometer for performance.
The Credit Research Foundation found that in Q4 of 2014, the average DSO across all industries was 39 days or customers paid on average of 9 days late. While benchmarking against averages isn't ideal, it can at least show that there may be potential for improvement.
High Dispute Rates
Disputes are an easy way for customers to avoid making timely payments. Typical disputes range from problems with pricing and invoices to quality and delivery. If found to be invalid, the customer did nothing more than delay payment until your team was able to get back to them with a resolution. If valid, the situation should be considered far worse. Valid disputes show a breakdown in the supply chain to the customer- for example, shortages may be an indicator of warehouse theft. The only way to really fix a heavily disputed portfolio is to run through each dispute to its root cause and implement process improvement.
Whether valid or invalid, disputes divert the AR team from their focus of collecting receivables to resolving late transactions. As this happens, the DSO climbs and the financial health of the business starts to suffer.
These are just three examples of how to spot an underperforming receivable. If these problems exist inside the business, ignoring them will only fuel customer attrition. As we start to use data to analyze every facet of business, we know the cost of obtaining each customer, so we need to invest in making sure the business they interact with promotes a healthy relationship.