A/R Management & Automation
Collections Analytics
Customer Self Service Portal
Customer Invoice Distribution
Cash Application
Gaviti Disputes and Deductions
Credit Management and Monitoring
ERP Compatibility
Use cases

A/R Management vs Debt Collection: What’s the Difference?

Since your company’s ability to get paid quickly directly impacts your cash flow, it’s important that you have a strategy for both your accounts receivable management to encourage the timely payment of invoices. For some customers, however, you’ll need another strategy altogether for collecting unpaid and overdue invoices: debt collection. These two strategies have different elements and are applied differently based on a range of factors that we’ll discuss below.

The Key Components of Effective A/R Management

The main aspect of A/R management is the collections of receivables. Effective accounts receivable management has several elements that can be automated to facilitate the collections process.

These include:

  • A streamlined dunning process. This includes proactively managing invoices that ensures that receivables are paid on time. You should be able to customize these workflows for a wide variety of customers in different industries, clearly state the payment options and terms in all communications to avoid future miscommunications, and send and track them using an automated system.
  • Streamlined credit management. With a streamlined processes in place and the ability to centralize reliable data in one place, businesses can make quick decisions related to customer credit, such as both automatically extending credit limits to creditworthy customers and limiting credit lines to those who pose a higher risk to the business.
  • Fast and efficient payment reconciliation. Payments should be matched to invoices accurately with multiple banks to ensure that your business has a clear understanding of its cash flow situation. Automating and streamlining this process also helps to minimize disputes, saves time and resources, facilitates faster payment and reduces processing delays.
  • Quick and easy payment gateway. The payment processes should include options that make it as easy as possible for customers to pay, with simple payment experience that includes automated reminders, multiple payment options and secure payment methods.
  • The ability to create and measure KPIs. This requires putting accounts receivable performance metrics in place such as DSO, actual median days delinquent (MDD), collection rate, and aging buckets to gain an understanding of the current methods for the collection process in accounts receivable is optimal, or if changes should be implemented.
  • Dispute resolution. Customer disputes traditionally involve a lengthy, manual process that involves collaboration between many different roles and departments in the company, including sales, procurement, inventory, logistics, and A/R. Customers should have a process in place for resolving disputes that minimizes bottlenecks, facilitates cross-collaboration within the organization, and offers greater visibility into the reasons and handling of these disputes.

The Key Components of Debt Collections

After a certain timeframe, however, usually between 60-90 days, depending on your industry and the payment cycle, your accounts receivable team may determine that it is no longer worth their while to pursue certain customers for payment. At this point, the receivable is now considered a debt. Since the invoice is overdue and the company has exhausted all proactive measures for collecting the invoice on time, it demands more aggressive methods for collecting receivables. Even with the most proactive A/R collections process in place, not all customers pay on time, for a variety of reasons.

Important elements of debt collections include:

  • Identifying and prioritizing overdue accounts. It may be worth pursuing collecting debts from specific accounts over others, such as ones with the most debt or the ones posing the most payment risk. This element relies on the debt collectors to have visibility into the customer accounts to view customer information such as aging reports and the amounts owed.
  • Deciding between debt collections and write-offs. Accounts that are 60-90 days past due on their invoices are considered to be severely delinquent. At times it may not even be worth outsourcing debt collections. You may need to write the debt off instead.
  • Pursuing legal action. One of the last resorts for collecting debt from customers is by taking them to court. When pursuing this avenue, businesses should carefully evaluate the time and resources they have for preparing for legal action, their chance of winning, and whether or not it might be best to outsource the legal action to an outsourced party with both the expertise and proven history of collecting receivables in court.

A/R Collections: In-House or Outsource?

While the management of accounts receivables can be outsourced, it can also easily be maintained in-house with the adoption of A/R collections management software. The benefits of in-house collection of accounts receivable include maintaining full control over the process, the customer relationships, and as a precaution for maintaining customer data security.

Once the accounts receivables process is past the point where the company deems it realistic to collect the receivables, however (often 90 days, but it could vary), it becomes what is known as debt collection.

At this point, it is often best to outsource debt collection to a third party for a number of reasons:

  • It’s a waste of your company’s time and resources. Proactive methods such as offering flexible payments and a variety of payment methods, customized dunning workflows, and even dispute management haven’t been successful in collecting invoices. A simple cost-benefit analysis has now determined that your A/R team’s time and resources are better invested in collecting invoices from other customers.
  • You want to maintain or preserve the customer relationship. Many businesses don’t outsource their accounts receivables collections because they don’t want to risk damaging the customer relationship and prefer to maintain control over interactions. But at this point, the customer hasn’t responded to any of your proactive A/R management or more aggressive methods for invoice collections. This is no longer a concern once the overdue invoice becomes a debt. The priority now is to collect the invoice.
  • They have demonstrated proven success in debt collection. Hopefully, with the more proactive A/R management methods you employ for the collection of accounts receivable, most of your customers pay their invoices on time. Debt collection, on the other hand, may be a process with which your business is far less familiar. A third-party debt collections agency that specializes in this type of work is more likely to be able to capitalize on its experience with these types of customers and succeed in collecting the invoice.

Build the Best A/R Team

If you are thinking about bringing your accounts receivable in-house or you are experiencing challenges hiring the right people, this guide is for you. Download this guide and learn:

  • The challenges of scaling a collections team
  • How to handle and better manage these challenges
  • The best tips on effectively building your own A/R collections team
Download the Ebook

How Gaviti Streamlines Your A/R Management

Gaviti’s invoice-to-cash A/R management platform automates and streamlines A/R management to optimize the entire process, from collections to credit monitoring and dispute resolution. Its modules work together to facilitate the timely payment of invoices and minimize late or overdue invoices, with little to no involvement from the IT team.

These modules include:

  • Collections analytics. In addition to providing traditional A/R performance metrics such as DSO, aging buckets and collections rates, it also provides additional complex metrics such as Median Days Delinquent (MDD), customer risk and payment forecasting and external live data relevant to your collections data, such as the interest and inflation rates. A/R performance metrics evaluate collections activity on both an individual and team level.
  • Cash application. Match payments to invoices to deliver automatic reconciliation of your accounts. The ability to connect the module to multiple banks accelerates the cash application process and reduces processing delays, facilitating faster invoice collections.
    The module also tracks and centralizes credit-related history, enabling greater visibility across the organization so that it can work towards optimizing the A/R management process.
  • Credit monitoring and management. Receive the latest near real-time data about your customer’s credit history and risk and automatically limit their credit, or have a policy in place that does not extend credit to higher-risk customers beyond a specific threshold. Use the data received to allow these types of customers more flexible payment plans or partial payment plans to minimize unpaid or late invoices.
  • Dispute resolution.  Gather A/R data from different types of disputes to gain better insight to resolve similar disputes of the same type more quickly in the future and avoid delays in collections altogether. Having this data in a centralized point is ideal in the event of an audit.
  • Self-service payment gateway. By giving customers a variety of payment options, including credit cards, debit cards, ACH transfers, electronic wallets and secure and fully-compliant payment gateways such as Bluesnap and Stripe, you’ll build customer trust and enhance their payment experience, making it easier for them to pay on time.

Want to learn more about how to optimize your A/R management while improving your team performance? Speak to a Specialist to see how Gaviti works.

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