How scoring can prioritize collections strategies and lower DSOs.(SELECTED TOPIC)(daily sales outstanding)

Scoring has been a very hot topic in the credit world over the past three years. Many issues have been driving this trend, including Sarbanes-Oxley compliance, lower technology and modeling costs and better education on scoring. A recent survey of America's top companies by the Credit Research Foundation (CRF) showed that over 30 percent of the companies that are not currently using scoring will implement it over the next year, and over 40 percent of the companies that are not currently using scoring will implement it within the next one to two years. While this trend is encouraging and scoring will certainly drive value within your organization, I believe that many companies are missing a tremendous opportunity to further lower DSO by not utilizing and factoring a customer's credit risk into collection strategies. In fact, the same study by CRF showed that only 21 percent of the companies that utilize scoring used it for collections prioritization.

Today, most companies collect on all accounts based on paper aged trial balances, working from right to left on the aging report--not considering the risk of the account, just the past due balance. In a manual environment with existing resources, this is the best strategy to collect on those A/R balances that will have the biggest impact on DSO. However, in an automated environment, a company can touch many more accounts--through phone, e-mail, fax and letter correspondence--which allows for more strategic ways to prioritize your collection activity. The credit risk scores generated today will help your organization prioritize resources and drive collection policies to help optimize recovery in the future. Utilizing scoring to prioritize your collection strategies, at a high level, requires three steps: risk score your account portfolio; utilize software to prioritize the accounts to call; and develop collection strategies to optimize recovery.

Risk Scoring

The first step is to assign a risk score/collection recovery score to a portfolio of your accounts. Risk scoring a portfolio of accounts can take many forms. Your organization can utilize its own rules/judgmental based scorecards, utilize a third party to develop a custom statistical/behavioral based scorecard(s), and/or utilize the current bureau statistical scores to score your accounts. Regardless of the model used, the risk score should determine both the willingness and ability of your customer to pay its bills. Factors used to identify risk in scoring models include:

* How the customer currently pays other companies;

* How your customer pays certain industry groups--it may be more relevant to understand how a customer pays bills to your competitors;

* Size and stability factors, such as years in business and number of employees;