Five ways to minimise collection risk 

Business risk – and consequently – collection risk is on the rise. Over the last three years, more businesses than ever have been unable to meet payments terms.  

 The bumpy economic picture has meant businesses are having to make difficult decisions to manage their own cash flow – often resulting in delays to payments. An estimated £23.4bn is currently owed to UK businessesin outstanding invoices, up from £17.5bn in 2020. 

 Furthermore, according to the Commercial Credit Data Sharing Initiative (CCDS), loan arrears rose significantly from the start of 2020 to the end of 2022, increasing from 0.7% to 2.83%. A sure sign of stress on UK plc. 

 The stress on payments is highlighted in the latest trade finance figures, with D&B’s data showing the highest insolvencies rate in a decade.

 All businesses are experiencing the same headwinds, and these external forces put collectors in a difficult position. There’s a balancing act between ensuring their own organisation's cash flow remains strong, whilst also judiciously managing the relationship with longstanding customers, many of whom are also in a difficult position.  

 But walking this tightrope is creating pressure. And the resources required to chase late payments adds a further strain on collections teams. In particular, small businesses are hit the hardest, costing an estimated £684m a year, with most receiving payment 5.8 days late on average. 

 How can businesses respond? Let’s explore how reducing collection risk could form one part of the equation.  

What is collection risk?  

 Collection risk is the possibility your business will not receive payment for goods or services, with the customer unable to meet their contractual terms.  

 Quite simply, if a business is less likely to pay, collection risk increases. And reducing your collection risk is a key factor that will likely improve cashflow.  

 A straightforward way of thinking about collection risk is assessing what’s within your control, and what is outside of your control.  

Within your control are collections policies – while often overlooked – they are an essential part of a sound and comprehensive credit policy. Having an effective collections policy in place promotes consistency and efficiency, while aligning corporate goals with business procedures. 

 Given the current climate, also revisiting your collection strategy provides greater clarity for collections teams, ensuring any actions are appropriate and proportionate. Doing this is critical for protecting accounts receivable, without harming customer relationships. 

By better managing what’s in your control, it makes external factors easier to handle. Surprises and unforeseen events will always occur. But while you can’t control the external market you can ensure your business is better prepared for it.

How to manage collection risk effectively in five steps 

Now let’s look at the strategies, techniques, and technology which can help finance teams manage collection risk.  

1.  Segment your customers: This allows collections resource to be prioritised in the highest risk areas. By getting a better understanding of either low value, or low risk collections, you can also decide on which customers can be chased later or other collection actions can be deferred.  
2.  Catch problems before they arise: Better collection treatments and even early intervention can help avoid difficult conversations further down the line. Examples of this can be sending automated email reminders, and speaking to the customer directly to ensure any discrepancies or disputes have been resolved.  
3.  Take a data-driven approach to collections: Business can be more targeted in their contact with customers when using data. Arm your team with the right metrics, and use these insights to inform where energy needs to be focused. For example, data can help you understand a customer’s willingness to pay versus their current ability to pay. 
4.  Don’t forget – there is a person behind the business: We’re all human – and during this period of increased pressure it can be easy to forget about the person on the other side of the phone. Data can give collections teams additional insights to spot temporary blips – helping you adjust your contact strategy. Sometimes a gentle nudge might be all that’s needed to avoid rolling into the next delinquency cycle.  
5.  Aspiring for the perfect collection strategy: Collections is a balancing act. Being too heavy handed will mean a business won’t do business with you again in the future. However, having the right metrics in place well help inform your decision-making process.  

By taking a balanced approach, armed with the right data, effective collections can enhance business resiliency, improving cash flow, and retaining long-term customers to help your business grow and thrive.  

We help businesses – large and small – to make smarter decisions. D&B Finance Analytics combines powerful insights and technology to help finance teams manage risk, increase operational efficiency, and reduce costs, but if you would like to get started with a smaller number of International or European credit reports only, you can now order them online.  Explore how D&B can help you.