Ageing Analysis: The Importance of Tracking Customer Behavior

In his book 'The Fifth Discipline' Peter Senge discuses the concept of "a Lever" or leverage points in a system, where small efforts can make significant differences. From our experience we have noted that one such leverage point in managing your cash flow and working capital is analyzing the customer profiles and behavior on the customer ageing list, for suitable follow-up. In this article, we discuss a strategy that yielded a 30% positive impact across AR, Cash and Working Capital funding in four months time.

Customer Clusters

The first thing we did was we stopped seeing the Ageing list of customers only in terms of the age brackets of the receivable. Instead, we started classifying customers into groups based on their behavior across selected parameters. Considering that this business involved a large customer base for fast moving perishable goods, the parameters we used were the following:

1. Are these actively trading customers?
2. What is the response on follow-up calls?
3. Profile of receivable:

• The total receivable
• Receivable greater than 60 days
• Receivable greater than the cut off period that will affect working capital funding

Tackling Customer Clusters

Earlier, our team would make the follow-up calls for collections by faithfully going over the customer ageing list and politely reminding customers to clear their dues. As we defined the clusters and analyzed cluster behavior across the different parameters above, it became evident that a single-size-fits-all was a weak strategy. The customer maybe king, but some we called 'rogues', 'bullies' and 'misers'. Now, that is not the kind of language anyone wants to use to describe their customers! But it did wonders for our AR department as they devised strategies to match different customer clusters. Calling for clearing dues became more of negotiations than reminders and persuasions. Follow-up action was also simplified. Rogues went straight to the collection agencies. Bullies were stripped off credit privileges and put on COD (Cash on Delivery). If all these sound a bit harsh, that‘s not quite true. In fact Customer Relationship Management improved better than never before.

Improved Customer Relations

Classifying customers helped understand customers better than before. Contextualized discussions about payment clearance problems helped to solve them faster. Bottlenecks were identified and these proved to be stepping stones to significant improvement. But the best of all was the recognition of cross-functional roles in solving AR problems of the organization. In other words, we decided to enlist the company‘s sales force into a cross functional effort to manage the AR.

Improved Cash Flow - Track the DSO (Daily Sales Outstanding) overall and across Categories

"If you are a company doing $2.5 million annually in sales and you are able to reduce your DSO from 90 to 60 days, you will enjoy a one-time cash increase of more than $200,000," says Nancy Burma, former president of ABS. As we engaged the new strategy, we observed a direct improvement of cash flow of $350,000 simply through collections, compared to the previous quarter. Moving beyond the direct impact through collections, an effective control of DSO for healthy indices on cash flow is the new target.

Improved Working Capital Funding against AR

The lever for funding against AR, lay with customers who had greater than 20% of their receivable in the greater than 90 days category. Close attention to this group has a direct impact on the funds available from the bank on a periodic basis, thus improving the working capital management. In this regard especially, our service became a strong ally of the CFO as some of his biggest concerns on cash and working capital began to get much better management..

How can TA help me?

At TA, we are committed to helping you resolve your problems in accounts receivables management. We understand that you have more important issues to deal with on a day-to-day basis, like selling and executing the service or servicing your clients. With our commitment to helping clients focus on their core business, we‘ve designed a gamut of services, including:

How can TA help me?

At TA, we are committed to helping you resolve your problems in accounts receivables management. We understand that you have more important issues to deal with on a day-to-day basis, like selling and executing the service or servicing your clients. With our commitment to helping clients focus on their core business, we‘ve designed a gamut of services, including:

• Employing a team of agents on a FTE basis to exclusively manage your company‘s work
• Sending you reports on a regular basis on your Accounts Receivable positions
• Identifying the behavior patterns of clients as per the Ageing Analysis
• Highlighting the individual problem accounts in your books
• Timely follow up with your clients
• Strategizing with you on approach to be followed in the recoveries from your important clients to reduce losses and delays in payment
• Collecting the recoverable amounts on your behalf

Outsourcing Ageing Analysis

Outsourcing your AR management processes and ageing analysis can help you concentrate on your core business, reduce overhead administrative costs, avoid bad debts and keep abreast of changes in the law.