With cash-strapped consumers across the country taking extra time to pay their bills, organizations should expect higher bad debt and slower payments to continue.
Credit and collection leaders that proactively adjust their credit and collections processes can position their teams well in advance of an economic downturn—and enjoy other benefits, such as higher customer satisfaction and retention.
As consumer debt levels continue to rise, many organizations are forecasting a decrease in cash flow due to the extended timing of customer collections. This trend will likely continue, with US inflation hitting its highest level in over four decades and minimal economic growth.
This time of financial uncertainty leaves Collection teams with the challenge of recovering past-due accounts while navigating these murky waters. They must proceed cautiously, carefully balancing the business' needs with those of their past-due customers.
To prepare your collections team for a growing number of past-due accounts, we recommend the following five strategies:
Step 01: Minimize cash flow impact
We're facing a time of cash flow uncertainty. In a 2022 study, 38% of consumers attributed being late on a payment to cash flow issues. And when consumers cannot pay a late bill in full, 48% prefer having the option to make payment arrangements and 38% to make a minimum payment to show good faith.
The impact on businesses during this looming 2022 recession is two-fold: on the one hand, there are crucial opportunities for digitization as consumer debt rises. On the other hand, the company's financial health is at risk and needs to be a priority to meet the organization's cash flow goals.
For example, higher Days Sales Outstanding (DSO) indicates delayed payments and could signal a cash flow problem. Digital collections software is one way to improve DSO, allowing organizations to run automated outbound collection campaigns via email or SMS. This outreach plan should complement their current workflow and align with their digital collections strategy.
Step 02: Be proactive
Today's approach to collections transcends the call-and-collect process. Shifting from a reactive to proactive approach enables companies to provide a better past-due customer experience while maximizing the likelihood of debt recovery.
To avoid falling into a defensive state, companies can actively prevent past-due incidents by using predictive analytics to anticipate which customers will likely become past-due. These tools can predict when a customer is likely to enter into debt based on patterns in data, such as:
- The rapid accumulation of high spending on a credit card
- A series of missed bill payments
- Consistently making only the minimum repayment required
By finding ways to simplify the payment process proactively, organizations can incentivize past-due customers to settle their accounts. As observed in a 2022 study, 55% of consumers would feel more inclined to pay a late bill if they received personalized emails or SMS reminders showing empathy and a desire to collaborate.
Step 03: Track crucial KPIs
As Peter Drucker, the famous management expert, said, "What gets measured gets done." Tracking Key Performance Indicators (KPIs) is imperative to making strategic and operational improvements. As inputs and customer behavior change in the face of higher prices and interest rates, companies must ensure checkpoints are in place to respond quickly to any red flags. When it comes to collections, some KPIs to consider include:
- Productivity levels
- Automation levels
- Anticipating late payments and disputes
- Net promoter score (NPS) analysis
- Net retention rate (NRR)
- Days sales outstanding (DSO)
Step 04: Optimize costs
Optimizing expenses is a typical response to a market downturn in which every dollar spent must be evaluated for its return on investment (ROI). Limited resources bring opportunities to redefine collection processes and make them lean and cost-effective without compromising customer experience expenditures.
For example, companies can drive late payers to less expensive digital self-service tools and optimize the cost per dollar collected. The right digital collections software can profoundly impact a company's bottom line. A SaaS solution can save organizations the ongoing time and expenses of maintaining complex technical infrastructure.
Vikas Srivastava, Chief Revenue Officer at FX cloud solution provider Integral, estimates that using external solutions (as opposed to in-house alternatives) can reduce a company's tech spending by up to 80%.
Other ways to optimize expenditures include collaborating with managers from different departments to identify more opportunities to reduce costs without hurting performance. Reviewing the ROI of all existing processes and streamlining them for maximum efficiency is a great starting point.
Step 05: Build to scale
Automation is a cost-effective instrument to improve collection performance and productivity without sacrificing the customer experience, especially in light of a possible 2022-23 recession.
Although some cases will require human judgment and contact, such as negotiations and extremely high-risk collection cases, automation can help scale your existing collections process without adding more operational costs.
For example, when the number of past-due accounts grows too high, some managers will have agents take on costly overtime hours or begin a time-consuming recruitment cycle to hire more staff. Both "solutions" are ineffective and likely challenging to approve during a market downturn.
Alternatively, digital collections software lets agents focus their time on more complex, high-risk accounts that demand human interaction. The goal is not to replace agents but to enable them to be as impactful as possible.
When preparing for a growing number of past-due accounts, digital collections software can help companies recover more debt faster. Talk with an expert to learn how to level up your past-due customer journey.