Return on Investment, more commonly known as ROI, is a financial metric used to measure the efficiency of an investment or project by comparing the benefit generated to the cost of the investment itself.
For example, let’s say you invest $100,000 in a project that saves your organization $300,000 of your team’s time. That project has a 300% or 3x ROI.
How does this apply to your accounts receivable processes? Chasing failed payments is time-consuming, and takes your team’s focus away from strategic, value-add projects. Automating your AR processes can help you streamline the collection process and collect more revenue – and realize ROI on your automated collections investment.
This video explores two ways to measure ROI on your automated collections investment: the costs involved in keeping your collections process in-house, also known as first-party collections, and the expense of referring collections to a third-party agency.
ROI on First-Party Collections
To understand the cost of first-party collections, we look primarily at the costs associated with the people that do the work. That includes your staff, along with the systems they use to capture customer payments.
Let’s take a look at an example:
You have an AR team of five, who spend a significant part of their day on the time-consuming manual process of calling and emailing customers that owe you money.
There are also payroll taxes, rent for office space, employee benefits, and other expenses. The Small Business Administration projects that you can expect to spend an additional 25-40% per employee in costs above their wages.
Once we know the cost of the current, fully manual system, we can calculate the benefits of accounts receivable automation. Investing in an AR automation solution delivers ROI in time saved, allowing your team to focus on higher-value tasks. And sending the same collections email 100 times is not a high-value task.
If we assume that the team spends 25% of their time each day contacting customers to request payment, that adds up quickly – to nearly a day and a half every week. With accounts receivable automation software, you can reduce that number to only 5%. Many collections happen without any human interaction required.
Even more impactful, automating initial dunning emails allows your team to spend more time on meaningful work. Instead of copy-pasting the same email over and over, they are now dedicating their time to your most complex cases. Your team can use the recaptured time to tackle projects that add value and drive growth. What would you do with the additional time and resources?
Savings on Third-Party Collections
When you send your bad debt to an outside agency for collection, this is known as third-party collections. These agencies typically charge a percentage of the debt to be collected – anywhere from 20-35%.
If you turn over $1M in uncollected debt to a third party, they retain approximately $200,000 to $350,000 of that $1M of your invoices. In contrast, by automating your accounts receivable collections, you only need to reduce invoices sent to a third-party collections agency by 2% to recoup the cost.
In addition, keeping your collections process in-house means that you retain control over every aspect of the customer experience, instead of risking those relationships with a third party.
Want to calculate the ROI on Automated Collections for your organization? Check out our ROI Calculator, or get in touch today – we would love to run the numbers with you.