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How measuring collections effectiveness exposes critical issues

Dig into collections effectiveness and exposing the critical issues with Martin Roth and Matt Shanahan. They will go through some collections best practices and benchmarks from data that Matt and his team has dug up over their lifetime of experience. Finally, they will talk about why lien rights are particularly important for credit managers in the construction industry.

Full Transcript

Martin Roth:

That’s me and that is the Lockstep Chief Strategic Officer. I run the revenue team here at 葫芦影业APP. I’ve been doing these webinars every other week. So if you’ve joined any of those previous ones, thank you for being a loyal fan. Uh, we get into some exciting topics like managing collections, managing lien rights for, for contractors. And this webinar came about Matt and I were talking, um, a couple months ago, actually. And we were just talking about some mutual customers and some of the challenges that these customers have and some of the, um, the cross-functional impacts that what his platform does and what the 葫芦影业APP platform does. And had, there were just some interesting best practices that come about whenever you see the intersection of collections, automation and efficient lien rights management. And so today that’s exactly what we’re going to talk about.

 

Martin Roth:

We are going to dig into collections effectiveness and exposing the critical issues that need to be solved with collections effectiveness. Uh, the second thing we’ll we’ll go through is some collections best practices and benchmarks from some great data that Matt and his team has dug up over their lifetime of experience doing this and helping large distributors, suppliers, and credit teams effectively manage the collections process. And then finally, we’ll talk about why lien rights are particularly important for credit managers in the construction industry. It’s funny, Matt, you were saying the other day, how the, um, when you think of distributors and suppliers, uh, like a plumbing distributor or lumber company, or, you know, fill in the blank with whatever distributor supplier that happens to supply to contractors. You don’t think about them in, in, as being in the construction industry, but they are very much at the, at the whims of the, of the market individual supply chain.

 

Martin Roth

Exactly, exactly. So we’ll dig into all that, but with that, I’m actually going to turn it over to Matt and he is going to drive and take us through the first two. So Matt, take it away.聽

 

Matt Shanahan:

One of the things I want to focus on is really this issue of manual collection. So it’s pretty critical of, you know, especially in today’s world, Milky that some background on that, like AR automation, that’s a much better way to get paid and more effective because next slide, really what you’ll see is the fact that the pandemic has really exposed some underlying condition, both in credit risk management, as well as collections management, NEC, and that’s not going to go away for a while. Um, we very much track what’s going on in terms of this new normal, um, the best best estimate right now is at the end of 2021 is when the U S as a whole will go into phase four. So that means that there’s still a lot of uncertainty, you know, in terms of, you know, credit risk. And there’s also a, of past due, if

 

Matt Shanahan

It goes to the next slide, you’ll see the fact that really in the U S right now. So this is data that comes from at radius, a credit risk insurance company. And last June, the past due for the United States was 24%. It’s now at 43%. So that just shows you, you know, how much has changed one way to think about that, just in terms of workload is the amount of AR that is, you know, effectively passed through as almost increased twofold, but the staffing that’s either the same or lower. So workloads are way up to go to the next slide. Um, and you can see that, um, as you dig deeper into this, cause it’s not past two by just a little bit, um, each aging bucket has increased pretty significantly with the over 90, uh, buckets in the largest one. Now it makes up over 14%.

 

Matt Shanahan:

And if you look at the payment dates, those are extending out further and further, which is ruining a lot of DSO. It goes to the next slide. And that’s because outlook and Excel, or, you know, Gmail and sheets really are cash traps. Uh, when you think about how those applications work, they’re not integrated into your accounting system, which means you’re manually transcribing between emails and your ERP. There’s no automation. It means all the followups promise, tracking, dispute resolution, it’s all manual, and there’s no activity management. There’s no visibility into what got done and who’s working on what, which is then effectively slowing down your cashflow. So the next slide, these metrics, we’ve actually done benchmarks to look at, you know, what is manual AR costume. Um, when you look at how many minutes it takes to make a phone call, and that involves, you know, pre-call, um, preparation, post call admin, how many that then therefore, how much capacity does any collector have on a given day?

 

Matt Shanahan:

And what we’ve recorded is less than 10% of the customers really are contacted about their invoices. Cause everybody’s waiting till it’s extremely late. Again, this is a major drag on cashflow. So what we, what we provide when I talk to that AR automation, there’s kind of three buckets of things that we do just generally. One is automated customer communication. So based on the aging of the invoices or that new customer being created, how do you create personalized communications go right to the person? So as to nudge them along to an on time payment, the second we provide collections activity management, a way essentially workflow system, so that you can really think of what’s the next best activity that you need to do. And the third is we provide a customer self service portal, so they can go online. They can pay you, they can access their invoices, all of that.

 

Matt Shanahan:

And what we do is we benchmark before and after, before somebody has turned on this, we know what, when we turn it, when we do our initial sync with a data system, we know what their current past due is. We know what their current delinquency is. We know all of that. And then we track it six months later and we’ve created benchmarks as what’s the impact of doing that. And we’ve done this over 170 times. And so we’ll share with you some of the data that we found for instance, on the next slide, we’ll see that, um, automated communication has a significant improvement. What we found is without automated communications, the average day is delinquent was 39 days with automated communications enabled the average days, delinquent dropped by 18 days. That’s an over 53% improvement. When you think about that, it’s the impact on cashflow and your overall PSL.

 

Matt Shanahan:

And the next slide, I’ll talk a little bit about, um, activity management, because really, if you think about it, accounts receivable and accounts payable for that matter are customer facing or vendor facing relationship management roles. And so pure automation is not always enough. You really need the human touch. What we found is that people who relied primarily on, you know, not using automation, had the, um, the highest pass to, and that’s what you see on that right hand column. So that’s showing people that primarily rely on collectors making calls. The left hand column shows the ones that just rely on automation. So they’re primarily relying on those automated communications. I talked about the middle column really shows the people who have basically a nice balance between the two. Um, those are the ones that saw the lowest, you know, past due percentage. So at 52% improvement over mainly manual communications.

 

Matt Shanahan:

Good. The next slide just talks about, um, basically online, um, invoice, uh, benchmarks. So this is showing the frequency of communication. Then what we did is we broke it up based on invoice size and said, you know, whoever communicates the highest, what is their past due and the people that communicate less often, what is there and what you can see is in every bucket, uh, you’ll see an improvement with a trend of people who communicate more often have lower pass to. And so it just shows the importance of having that automated communication and getting scalability out of your, uh, collections team. The final one we’ll look at is really talking about, um, online payments. So we track how many people provide online payments versus who don’t, what percentage of adoption they have in online payments. All of that. And what you’ll see here is for the people that promote online payments, there has to drop by over eight points and their average days, delinquent dropped by 14 days.

 

Matt Shanahan:

Again, a very significant impact on cashflow and on DSO and ultimately liquidity, which gets us into sort of the business case, if you will, for, um, you know, using collections, AR automation, every time we do, we sit down and we provide a hard ROI to our customers where we look at what is their current, um, aging, what’s their current past due. Then we look at their average state’s delinquent, and we can talk about an acceleration using the benchmarks that you just saw. And ultimately that increases working capital. So we can show how much more free cashflow comes in cash from operations, because you’re avoiding interest expense and things like that. The amount of staff time, you free up to go focus on higher priority activities. And then of course, because this is all liquidity and goes to the bottom line, you’re increasing shareholder value. We’re able to demonstrate that and bring a hard ROI into each one of these, um, cases.

 

Martin Roth:

Thank you, Matt does definitely insightful. And I think there’s some, when it talks about I’m going to touch on some crossover between some of the benchmarks you have, and some of the things we’ve learned, I wanted to share this with the group. This is a survey that we put out, we do it twice a year, a spring version and a fall version. There’s a link down there at the bottom. You can go to bit dot Lee slash pay report. What we do is it’s a national construction payment report. We get, uh, we had, I think it was six or 700 respondents on the last survey. So it was definitely a statistically significant sample size of responses on payment practices, payment behavior, um, challenges with payment. There’s all kinds of really good information that I wanted to pull out. Just a couple of notes that I think are really important to talk about, which is that payment is slow in construction.

 

Martin Roth:

The average time to payment is 83 days, right? And this includes subcontractors and general contractors, and they have wonky things like pay when paid and paid if paid. I’m sure you’ve heard that if you’re in, if you’re a credit manager for a supplier who supplies to construction companies, but the payment is just, it’s slow on construction projects. And the administrative burden is significant. Most, a significant majority, 80% say they spend a substantial time chasing payments. And this, this is making, that’s not with water because it just validates a lot of the research and benchmarks that they have, which is that it’s time consuming to handle this stuff. It’s tough. It’s cumbersome. And what’s most frustrating in construction is that it’s a bit out of your control, especially if you’re a supplier or you’re a credit manager. You’re usually one, two or three steps removed from the owner on the project, from the person who’s handing out the draws.

 

Martin Roth:

And really that starts with the trickle effect of the money, the payment chain on a construction project. So 54% of respondents said that payment delays are caused by slow payment above them. It’s not even in their control, right? And I want to point this out because I think it’s really important. This is from as a screenshot from the report, it says, contractors, subcontractors, your customers, they don’t protect their payments. Ultimately contractors are afraid to demand payment. They’re afraid of their reputation risk. They’re afraid of not getting the next bid on the next job. And so some claim that the lien process was complicated, but 16% or that it’s expensive. Another 16%, the 56% said they were afraid to lose a customer by using their lien rights on a project. But, you know, everybody knows in construction the best way to secure the debt for the work that you’re doing is to make sure that you have secure lien rights.

 

Martin Roth:

And unfortunately, too many companies up and down the chain from the owner all the way down to the, the supplier or distributor, they don’t worry about the lien rights until it’s entirely too late. And then the deadline has passed and there’s, they don’t have that remedy anymore. So we’re going to teach you how to get around this. This is why getting paid as hard and slow and construction, right? That it’s cumbersome because every state has different rules. The documents are complex. As States have nuances. It’s tough to keep track of it’s. Um, it’s easy to get wrong. There’s a lot of logistics with it. Uh, so that’s one piece of it. The second piece is that it’s hard to know who’s on the job, especially if you’re a supplier, if you’re a supplier and you’re two or three, excuse me, steps removed from the property owner.

 

Martin Roth:

It’s hard to know who that owner is or who that general contractor is. Even though it’s required, not just to make sure that you protect your lien rights, but also to make sure that if something happens, your customer skips town or some dispute comes up and you’re trying to resolve the issue, you need to know who you’re working with. And then finally, and this is where the reputation risk comes in, which is when you have to do the firefighting, the slow payment, the nonpayment filing liens, claims, lawsuits, disputes, that stuff leads to severed relationships and bad outcomes. And nobody wants bad outcomes. Nobody jumped gets on a construction project and says, and I can’t wait to file a lien on this project. Nobody says it. Everybody wants to avoid it and wants to do good work and have repeat customers. So how, how do you navigate this?

 

Martin Roth:

In fact, how do you, how do contractors prioritize? Who gets paid first? You got to look at the interest in what’s the self-interest of each participant on the job. Owners want to get the job done on time and under budget, because normally they’re borrowing the money and time is money because they’re paying interest on the loan, right? So they want to get the job done on time under budget, and they don’t want to double pay for work. The second thing or GCs rather need the job free and clear of liens and disputes so that they can deliver the job on time and under budget. Right? So they’re trying to avoid fires, subcontractors. They need cashflow to finish the job, too many subcontractors. Your customers are going from job to job sometimes using money from one job to fund another job. If their balance sheet is a big enough, which unfortunately, especially in today’s economy, a lot of subcontractors are working on really, really thin balance sheets right now, because cash is tight, right? And that leads to a situation where suppliers are left holding the debt for too long.

 

Martin Roth:

So how do you get in the top of the payment line? How do you get prioritized for payment? And the first step is you need to set the right expectations, make sure that your lien rights are protected, goes without saying that if you don’t send your notice and it’s required, you lose your lien rights. So just make sure that you’re familiar with the laws in your state, make sure you’re taking the right actions to send your preliminary notice. The second thing is get the paperwork straight, right? Review the contractors on the job to make sure you know, which ones are high risk and which ones are not, uh, made sure that it’s easy for your customer to get waiver a lien waiver from you that speeds up payment on construction projects, and then finally track your lien deadline in the event that you don’t get paid.

 

Martin Roth:

You want to make sure that you’re aware of that lien deadline, so you don’t go over it. Right? And then finally, when issues do come up, right, you want to resolve them before you have a bad outcome. So we like to say sending payment reminders and that you had a stat there that was talking about automated customer communication and their, their ticklers and, and, and automated things that you can set up in our system or in anytime collect that will get your, the debt request. I mean, the, the request for payment in front of that customer sometimes, and we see it all the time we have, um, if you look on the right hand side, this is a, uh, an animation of it. But in our platform, we can see companies communicating with each other about a debt. And sometimes it’s as simple as like, Oh, I didn’t even realize that that was still outstanding.

 

Martin Roth:

Can you just resend the invoice? I’ll pay it. There’s no issue. They just, it’s not at the top of their list. And so they didn’t know about it. So send a payment reminders, escalate issues whenever you, that debt is getting long in the tooth, right? So you want to avoid the lien. We recommend using a notice of intent to lien, which is a great document that it’s, um, it’s an escalation document that will definitely escalate the situation a little more tension, uh, related. However, it does lead to results because it gets the attention of the people on the project who need to make sure you get paid. And then finally make sure that you’re connecting across the paper chain. Sometimes, uh, we, we see customers of ours even communicating with the general contractor on a job to help us subcontractor pay an outstanding debt. Cause remember on a project they’re all in it together and they want to get the job done on time and under budget.

 

Martin Roth:

So we’re trying to resolve those issues before they come up, making this notice and waiver process easy. You can always research lien laws for the project and state on our website. So it’s free. You can go and look at what the rules are, make sure you put that tool in your, in your toolbox. Um, making sure the project information is right there. Part of it is just making sure that you get a job information sheet at the start of the project. But if you don’t get that job information sheet, you do want to make sure you get the, the, the property ownership, the legal property description, project type, all of those project participants. You want to make sure that they’re right. And then you want to use technology to make the exchange of documents. Very simple for the customer. So in summary, these are the pro tips from 葫芦影业APP.

 

Martin Roth:

We’ve done this for thousands, tens of thousands of customers. And for hundreds of thousands of construction projects with success is make sure you send a preliminary notice at the start of the project, especially if it’s required. There’s a good argument that you should send it, even if it’s voluntary, because it gets the attention of everybody on the job, lets them know you’re there. Make sure that you’re exchanging lien waivers electronically, um, recommend that your sub, your customers, your subcontractors are sending their pay applications electronically. That could be a big help. Um, the third thing is send a notice of intent to lien at least 20 days prior to the lien deadline, to make sure that you don’t have to file the lien. And then finally talk it out whenever issues come about, talk it out with your customer, um, to try to avoid the issue.

 

Martin Roth:

But if that fails, make sure to file the lien, uh, because if you don’t file the lien that you don’t have the recourse for the debt and that’s all, that’s all I have. I’m going to jump into Q and a. We, I put our email addresses here. So MJ and hannah@lockstephq.com Martin 葫芦影业APP. If you’re interested in either of the subjects that we talked about, you can reach us directly there. Um, anytime collect.com. It’s a great product. Make sure that if you’re interested in learning more about how to automate your collections process or how to make that collections process more effective and make your team more efficient, definitely go to anytime, collect. And then of course levelset.com for anything related to lien rights and construction, payment management and best practices somebody asks, can we get the PowerPoint? Absolutely. We volted email the slide deck to everyone.

 

Martin Roth:

So you have all of those good stats and you know, it will be good, Matt. We should make sure in that email. Um, and I’ll, I’ll make sure that our marketing team sends it out. But the link to the, um, I know y’all have a report with the benchmark report that y’all y’all produce, but what your gear muted that, you know, we do have a benchmark report it’s available on our website. So, uh, feel free to download that. Um, perfect. Yeah. And we’ll, we’ll make sure we link to it in the, um, w we’ll link to it in the, in the followup email. Any other questions from the group?

 

Martin Roth:

Well, I’ll, I’ll ask you a question. I have a question for you, Matt. So when you look at your, um, across your customer base, what’s your, what’s the top like, um, efficiency, hacker trick that you see could a credit manager, collections teams implementing. I think the biggest, uh, hack that people are doing right now, just moving all of their customers online. Um, we had one company. I can’t give the name here, but, um, they essentially had over 6,000 customers that they were, um, invoicing on paper. And what they did is they set up a Google form. Um, and they collected every, they had to enter their account number and an email address. And that then got automatically populated into our system, which then started them onboarding and they stopped emailing invoice or physically mailing invoices and switched to every one of those digital. And that, that saved them over.

 

Martin Roth:

I think it was 90 hours a week of invoice overhead, um, and it celebrated their payment. That was a good, simple hack. Other people are actually been doing, um, automated emails around coven, um, promotional things around, Hey, if you, if you’re experiencing things, you know, do call us and give us an installment plan. So it’s interesting just saying, you know, different people are starting to think more like marketers, if you will, um, in the AR um, arena and thinking about they are really in a customer relationship role. Totally. I love that. And it’s so true. Cause when you think about any interaction, any customer interaction as a touch point, whether it be an invoice or a phone call about collections or a phone call about anything. Um, and so when you put that marketing lens on it and you take about the brand and how you’re representing the customer relationship, um, it changes the language that you might use and it changes the approach.

 

Martin Roth:

That’s definitely a smart, a smart trick that, um, you know, it’s a best practice for companies right now. Absolutely. What are some of the, what are some of the tricks that you’re saying? We so on the, I think the, so what’s weird. What happened in construction is you saw, you saw commercial, the commercial products have such a long gestation period that whatever was in progress, unless the state shut down construction, they pretty much continued. Like they were still bridging. They’re still building bridges and hospitals and roads and all that stuff just kept going. But what happened was residential construction just like took off, um, whether it was residential renovations, you’ve seen all the articles about Home Depot selling out of all kinds of stuff. Lumber is a, is in a huge shortage right now across the country. Uh, but even some of the big home builders are accelerating residential production. And it’s because so many people are moving from urban centers because they now have the flexibility to work remote. They found that they are productive. And so the demand for suburban housing is significantly higher than it was even, you know, six to eight months ago. And so there’s some interesting things there, but when you think about like a, a hack in this, in this environment, you know, we, the challenge right now in construction is that

 

Martin Roth:

Everybody’s on the job and they’re not in the office, right? So they’re either on the job or they’re remote. And so for a, uh, for a credit team, it’s tough to get in touch with the people who have the money, uh, and, or at least tougher than it was before. And so, you know, um, one of the hats that we’re seeing is, and this is not a hack, it’s just like a best practices that when you have a customer, make sure you have the right contact information, make sure you have more than just their office phone, make sure you have a cell phone. Uh, if these are good customers, like they’re going to give you their contact information. And I know that’s not as like a, that’s not a super, um, insightful hacker or anything, but it’s just like, uh, uh, common sense practice. But that’s one of the challenges that people are having right now is that they’re just not connecting with people because contractors are either on the job or they’re at home with their, you know, working, working from home or from a home office.

 

Martin Roth:

And so you just want to make sure you have the right contact information. And then, you know, more importantly, we’re seeing aging get the DSL, like average DSO. We track across all of our customers, average DSO is going up. And so I don’t think we’ve seen the worst of it. Unfortunately I think that we’re, we’re probably in, you know, our guests is Q one or Q two of next year. Um, you’re going to start seeing more significant bankruptcies and, and real delinquent debts. Um, we, one thing that we pull is we look at all of the lien filings across the country and we’re pulling like six or 700 counties right now with all the liens that are getting filed. And so what we see is a higher frequency of bulk liens, which means that somebody is filing, you know, 70 liens on 70 different properties, but the same property owner or the same franchise, and not literally Walgreens, but like, think about that like Walgreens locations or something like that.

 

Martin Roth:

Um, we’re seeing the higher frequency of those, which is always an indication that, okay, people are starting to drag it out. That’s the other thing that we do is we pull bankruptcy filings, um, as it relates to construction companies. And you have, um, you have pretty significant companies that are filing for bankruptcy bankruptcy right now. So for example, um, there’s on the RER, which is, uh, I think the rental equipment register, they do an RER 100, which is the top equipment rental companies. And I think number is number 12 or 13. It’s a company out of Houston, uh, just filed for bankruptcy. Um, so, and, and we’re only in August right now. So I think we’ve, we’re at the beginning of the next six to eight months of probably some really tough stuff. And so getting prepared for that, you know, we’re always gonna encourage people to make sure you protect your lien rights because you just submit your place as a creditor in a bankruptcy proceeding. Um, obviously that everybody’s going bankrupt. Most of your customers are going to be fine. It’s not doom and gloom, but those are some of the things that we’re. And so, yeah, best practices around that, or just make sure that you’re you’re, you understand what you need to do first of all, but then of course, make sure that you’re, uh, you’re taking the necessary actions to protection lien rights.

 

Martin Roth:

Cool. Well, we don’t have any other questions with that. We can conclude this webinar and we can get everybody out of here two minutes early. I appreciate the time. Thank you so much, Matt, for joining us, we loved having you and hugging. Yeah, of course. We’ll keep an eye out for an email, follow up with some of the, the, like the PowerPoint and the, um, and some of the helpful links that we mentioned throughout this webinar.