Using metrics as a root cause analysis and customer service tool

Payment delinquency is a common but costly reality for credit professionals. Although cash flow issues are the primary cause of payment delays, sometimes the fault lies with internal inefficiencies on the servicing company’s end. Distinguishing between the two causes can help determine who is responsible for the delay and how to respond. 

Why it matters: Without this distinction, companies risk penalizing good customers for their own processing failures while simultaneously overlooking bottlenecks that require corrective action. By leveraging internal metrics, credit professionals can identify the root cause of payment delays, address internal inefficiencies and improve customer satisfaction, all of which can minimize payment delays. 

Outside of cash flow issues, payment delays may be caused by external, industry-specific factors. For example, customers in the construction industry may withhold funds because materials did not meet their expectations or did not arrive on time. Customers working in agriculture or in seasonal businesses will have periods in which they simply cannot generate sufficient funds. For international customers, billing, central bank or regulatory issues are just a few reasons for delaying payment.

Sometimes, however, an internal inefficiency on the servicing company’s end gives the customer a reason to delay payment. Perhaps the invoice was not sent on time or did not reach the appropriate person or location. “As a shared services department, how we service our internal customers directly impacts how they service their customers, which we consider to be our external customers,” said Ty Knox, ICCE, director of credit and risk at EFCO Corp. (Des Moines, IA). “Being in the construction industry, we manage lien and bond rights, and depending on the state, customers will require lien waivers, furnishing letters or notices of nonpayment to be sent within a specific time frame. If we miss the deadline, we lose our lien rights to secure payment from the customer.”  

Finding the root cause 

If you notice that payment is slowing, your first instinct may be to reach out to the customer and ask what is wrong. However, that can be challenging when a customer is difficult to reach, upset or simply refuses to communicate. Having a system in place to differentiate between true customer delinquency and internal inefficiencies, can help you get closer to uncovering the internal issues behind payment delays.  

Some credit professionals have created internal key performance indicators (KPIs), quantifiable measurements used to gauge a company’s long-term performance, to track the internal factors behind payment delinquencies. According to a recent eNews poll, 30% of credit professionals surveyed use them often or have them built into their process, while 30% use them when needed. The metrics used vary by company, customer base and industry type. 

“We track how many errors we receive on a quarterly basis and our daily workload with an objective that 100% of cash received is applied daily,” said Knox. “We also track the timeliness of contracts received, typically reviewed within a 24-hour window, so that we can minimize contractual issues. Monitoring the timeliness of invoices sent to the customer is critical for securing lien and bond rights.” 

Sometimes, it takes one metric to accurately reflect where the issue lies. “We run a weekly report on the percentage of the total balance that is over 90 days, which we try to keep below 12%,” said Krista Jackson, accounts receivable manager at PS Wholesale Floors, LLC (Baton Rouge, LA). “In it, we notate what the percentage is, who those customers are, what orders are involved and how many days out they are. If there are any issues, we add a notation to the account to document why it has exceeded that percentage. Sometimes it could simply be an influx of purchases from a customer at one time, which lasts over 90 days—and that may account for pretty much all of their balance.” 

KPIs: Your performance enhancers 

Instead of looking at metrics as points of weakness, credit professionals can view them as opportunities to improve. “We focus more on items approved compared to items not approved and the billings that had to be resubmitted,” said Andrew Perry, CCRA, CICP, senior director, credit and collections at Clean Harbors (Deer Park, TX). “From there, we try to figure out why these issues occur—whether there is a need for additional training or resources that we can provide.” 

Having the right software in place can help streamline the process further. “We can manage and set performance expectations in our ERP system,” said Knox. “With it, we’re able to track a task’s status, from when it was first created to its completion. For instance, if we’re tasked with sending an invoice, we’re able to see time stamps from the time the invoice was first created to the time it is sent.” 

Through continuous improvement, even in the smallest areas, companies can start to see a positive correlation between customer satisfaction rates and payment timeliness. “We’ve noticed that as we meet and exceed expectations, customer satisfaction with our internal customers has significantly improved,” said Knox. 

The bottom line: Payment delays will always be a part of business credit. Credit departments with an internal benchmarking process are not just solving today’s problem; they are building a smarter, more responsive credit operation for the future.