Prevent Bad Debt with Risk-Based Account Segmentation

Driven by worries related to geopolitical crises, inflation, and interest rates, organizations have increased scrutiny of cash flow and revenue — and the processes that impact them. As finance and treasury leaders have been pressured to boost cash flow and growth, so too have the accounts receivable and collections staff that supports them. 

Help has come in the form of digital transformation. Accounts receivable and collections management teams have benefitted from updated technology that has automated multiple aspects, including workflows, account monitoring, communications, and remittances. 

But technology isn’t the only way to modernize B2B collections. It’s time to incorporate risk-based account segmentation to improve collections and recovery results.

What’s Driving Account Delinquency?

In general, segmentation of slow- and late-paying customers has been a manual, judgmental effort without key insights. For collections teams, assessing customers with aging receivables and maintaining an effective collections policy can be quite cumbersome. Risk-based account segmentation — underpinned by deep data and predictive analytics — can help.

Thoughtful, targeted collections strategies are needed urgently in light of current market trends. Chief among these is the continued volatility of supply chains. Incomplete or delayed shipments have prompted customers to hold or refuse payment of invoices. The more frequently that supply chains experience disruptions, the greater the threat becomes for protracted disputes and payment delays.

Worrying also are expectations for commercial bankruptcies. According to the American Bankruptcy Institute, the number of U.S. commercial chapter 11 filings for the first quarter of 2024 was up 43% over the same period last year. Total overall U.S. commercial bankruptcies increased 22 percent in the first quarter of 2024 over the first quarter of 2023. A rise in insolvencies and closures will almost certainly increase payment risks and complicate debt recovery for many organizations.

Digital transformation enabled companies to pivot during the pandemic, and many quickly targeted new segments worldwide with new offerings. While international expansion helped add accounts, it also brought home hard lessons about the complexity of cross-border payments. Accommodating multiple languages, currencies, regulations, and technologies requires significantly more time and resources, and collections managers are seeing payment timelines lengthen as a result.

Another trend affecting A/R and collections staff is the intentional delay of payments from larger companies to small and medium-sized businesses (SMBs). Industry observers feel that some large firms will persist with delinquent payments, strengthening their cash flow at the expense of smaller organizations that may have only modest collections resources.

The Benefits of Risk-Based Account Segmentation

As the potential for delinquent customers grows, the ranks of finance professionals appear to be shrinking.  When the Association for Financial Professionals (AFP) surveyed finance, treasury, and accounting professionals about their greatest concerns as part of its annual compensation report, 37% of respondents cited “recruiting/personnel/staffing.” Another 40% worried about “volume of work,” and 42% named “limited resources” as a top concern. 

Risk-based account segmentation is an important tool in ensuring that precious A/R and collections resources are assigned to accounts where they can be most productive. Traditionally, businesses have prioritized collections based on “oldest and biggest” —  sorting customers from the accounts receivable aging report based on the highest balances and the most days past due. This approach misses key financial signals and can result in a mismatch of collections managers, tools, and procedures to delinquent accounts. 

Match the Right Tactics to Accounts

Using risk-based segmentation to categorize delinquent accounts helps businesses develop strategies to optimize collections resources, increasing efficiency with both in-house teams and third-party collections agencies. Applying the right tactics at the right time enables collections managers to better predict the likelihood of recoverability. Collectors can focus their time and actions where they can matter most and reduce the volume of uncollectable accounts sent to outside agencies. 

For example, delinquent accounts in a lower-risk segment may not need aggressive calling tactics or a notice about the possible engagement of a third-party collection agency. These customers may be more likely to remit payment with just an automated email reminder — freeing collections managers to spend time on high-risk accounts with a greater propensity for write-off (for which more assertive outreach is needed) instead of those that are likely to “self-cure.”  

The collections team may choose less aggressive actions — such as adjusting credit limits, assessing late fees, or investigating disputes more thoroughly — for lower-risk account segments. Customers are likely to see these as reasonable actions, while more assertive actions may be perceived as premature and harsh. While the former can help to foster relationships and create better customer experiences, the latter may have the opposite effect — leading to lower retention, fewer renewals and cross-sales, and less stable cash flow.

How to Get Started

To begin building more targeted strategies with risk-based account segmentation, accounts receivable and collections management teams should consider four key actions. 

1. Combine third-party commercial data — including business credit scores, trade payment history, and financial statements — with your internal information for greater visibility into account history and disposition. This combined information can provide a clearer picture of account health and behavior.
2. Incorporate predictive risk scores and ratings to help you pinpoint and scope risks within delinquent accounts. With these analytical insights, you can create more impactful, specific strategies that align risk-based account segments with the appropriate actions and resources.
3. Consider purpose-built predictive analytics solutions to help automate and support accounts receivable and collections management. By streamlining processes and removing time-consuming or manual tasks, these solutions leverage powerful AI and machine learning to boost the productivity of A/R and collections teams.
4. Educate A/R and collections staff so they understand risk-based account segmentation and how to use it to prioritize accounts for collections. Transition them from the “oldest and largest” approach by focusing on the potential impacts to business (improved cash flow, increased efficiency, enhanced business insight) and to their own careers (more capacity to achieve their performance goals and metrics).

Get Paid Faster with Segmentation and Streamlined A/R

What’s the next step for accounts receivable teams that are ready to integrate risk-based segmentation into their collections strategies? Leverage Dun & Bradstreet’s unparalleled data and analytical insights via D&B Receivables Intelligence powered by FIS GETPAID to help improve debt recovery efforts and strengthen cash flow. D&B Receivables Intelligence smoothly integrates Dun & Bradstreet’s trusted risk scores and ratings to help you rank accounts for collections, simplify workflows, and increase efficiencies. How?

• Risk-based prioritization: With D&B Receivables Intelligence, you can combine our predictive analytics with your data to segment your delinquent customer accounts based on risk level and easily define rules-based treatment strategies.

• Dashboards and workflows: Get better visibility into the performance of your account portfolio and your A/R team and help guide them to the highest-risk delinquencies where staff attention and time may be most effective.

• Automated communications: Save time by contacting delinquent customers via AI-driven tools that send and read customer emails and automatically queue responses based on email content.

• Dispute management: With D&B Receivables Intelligence, detailed data on dispute status, aging, and reason codes help you quickly understand the problem, timeline, and other departments involved, so you can rapidly respond to issues that may delay payment.