Late payments are a significant issue for businesses worldwide, with 87% of businesses reporting late payments, and approximately 25% of businesses fail because of delayed payments.

Overdue payments can lead to a variety of negative consequences for businesses, such as increased financial stress, reduced investments, and even bankruptcy. Late customer payments raise a company's probability of default by 25%, and by 40% if payments are over one month late.

Similarly, businesses in Saudi Arabia are familiar with the challenges posed by late payments, reflecting a global trend that affects companies across diverse industries and regions. In light of ZATCA's recent mandate to comply with phases 1 and 2 of e-invoicing, it becomes crucial for these businesses to not only produce invoices that meet regulatory standards but also to enhance their receivables management. This step is essential to keep pace with the rapid digital transformation of their financial operations.

From our conversations with many CFOs and Finance Managers, KSA businesses are well aware of the challenges of late payments, but unfortunately, they are ill-equipped with the proper setup and process to address these increasing challenges.

The reality is that the majority of B2B businesses adopt a passive approach to collection; they issue invoices with payment terms of net 30+ days and expect their customers to wire the payment sometime in that range with minimal follow-ups, and this is where it becomes problematic. It's crucial to proactively and systematically follow up on unpaid invoices even before they are overdue.

Most finance experts we talked to see that a combination of accounting software, email, and a spreadsheet is the way to collect owed cash optimally. While this setup can work just fine for companies for a handful of invoices issued a month, it ends up harming your collection efficiency and DSO as you scale.

1. Managing receivables with accounting software or ERP

Accounting software is becoming increasingly used globally, and many finance experts find it easy to run their books using these systems. But how do AR managers and collectors currently use them to collect owed debt?

Accounting systems or ERPs offer minimal functionalities that assist in handling late payments, monitoring overdue invoices, and sending email reminders to clients. These features are quite sufficient for businesses dealing with a limited volume of invoices. However, as your company expands, managing these aspects becomes increasingly complex and an ERP falls short of providing:

1. Notifications or escalation: are you involving the right employees from your company and the right individuals from your customer, at the right time?

2. Workflow customization: how do you collect from customers with different contracts or personas? How many reminders should you send for Company A vs Company B?

3. Omni channel reminders: are you reaching customers in their preferred mode of communication?

4. Message personalization: what content should you write to maximize the chances of successful collection for Company A vs Company B?

5. Central context: how do you centralize all invoice data and communication in one place as fast as possible?

6. Segmenting customers based on default risk: how do you treat customers with the highest risk of default properly from an early stage?

2. In-house collection process

To address some of these issues, some B2B companies have invested time to build their internal collection system by utilizing 3rd party service providers. Many tools that can be leveraged to achieve this such as Microsoft Dynamics, Zapier, Mail Chimp, and Unifonic to stitch multiple systems together. These companies reported a significant upfront investment and maintenance cost coupled with the reduction of operational costs and DSO. Unfortunately, these companies are the exception rather than the rule.

3. Debt collection agencies

Businesses that face persistently high DSOs despite implementing in-house automated systems reported that outsourcing collection to a debt collection agency can be a viable option. After the dunning process, these agencies step in with human expertise and resources to effectively recover overdue payments. However, they charge fees for successful collection and could potentially strain customer relationships, as their approaches might be perceived as aggressive or impersonal.

When to consider adding an AR collection software

As businesses start growing their invoicing volume to, Finance Managers and CFOs found that adding a collection software to their tech stack is worth the investment. Here is a table summary of the different approaches to improving your receivables collection.

Know where your company stands

The first step to understanding your collection needs is to measure your Days Sales Outstanding (DSO), the average time to get paid, against your payment terms and industry average.

If you’re not unsure of how your collection performance compares with your industry average or payment terms, we recommend checking our free Days Sales Outstanding calculator. If your calculated DSO is higher than your industry average or payment terms, it might be time to start thinking critically about improving your AR management practices.

If you're looking to enhance your DSO management and improve cash flow efficiency, consider Levers as your guide. Contact us to explore how our solutions can supercharge your collection strategy.