Accounting Best Practices, Fifth Edition

7–3. Utilize Collection Call Stratification

The typical list of overdue invoices is so long that the existing collections staff cannot possibly contact all customers about all invoices on a sufficiently frequent basis. This problem results in many invoices not being collected for an inordinately long time. Additional problems requiring time-consuming research may include an incorrect product price, missing shipping documentation, or a claim that the quantity billed is incorrect. Consequently, collection problems linger longer than they should, resulting in slow collections and substandard cash flow.

A good approach for improving the speed of cash collection is to utilize collection call stratification. The concept behind this approach is to split up, or stratify, all of the overdue receivables and concentrate the bulk of the collections staff’s time on the very largest invoices. By doing so, a company can realize improved cash flow by collecting the largest dollar amounts sooner. The downside is that smaller invoices will receive less attention and therefore take longer to collect, but this is a reasonable shortcoming if the overall cash flow from using stratified collections is improved. To implement it, one should perform a Pareto analysis of a typical accounts receivable listing and determine the cutoff point above which 20 percent of all invoices will constitute 80 percent of the total revenue. For example, a cutoff point of $1,000 means that any invoice of more than $1,000 ...