Cash flow is the engine that drives businesses large
and small. Delinquent accounts are the brakes which
bring companies to a screeching halt. In recent
years, the tenuous nature of the economy has
pushed many companies to extend the time they will
permit an account receivable to age prior to
instituting formal collection efforts. Based on a recent
survey of members of the Commercial Collection
Agency Association of the Commercial Law League of
America (CCAA), this "loosening" of payment
requirements may be severely impacting on
companies' cash flows and bottom lines. According to
the survey results, the probability of collecting a
delinquent account drops dramatically with the length
of delinquency. For example, even after only three
months, the probability of collecting a delinquent
account drops to 73%. After six months, the
probability of collecting drops to 57%. After one year,
the chance of ever collecting on a past due account
is a dismal 29%. The results of this survey clearly
demonstrate the critical importance of taking positive
action when an account receivable ages past its due
date. Companies must take a hard line on past due
receivables, and turn to professional help when their
internal efforts do not prove successful. What can a
company do, internally, to minimize and better control
problem accounts?
DON'T ASSUME. While there are usually
established
credit practices in every industry, there are also
differences. It is important that your customers know
what your credit policy is in order to eliminate
misunderstandings. Reiteration of that policy, when a
payment is first overdue, is the first step in
facilitating payment.
KNOW YOUR CUSTOMERS. In today's
economy, no
company should extend credit without ascertaining
the customer's reliability. In the event, however, that
records indicate irregular payments, that account
should be kept under close scrutiny, with immediate
follow-up even a week after a payment is delinquent.
KEEP CREDIT RECORDS CURRENT. Companies
are not
static enterprises. Changing markets and
management directions can quickly alter the health
and stability of a company. Keep abreast of trade
reports on specific companies, especially those which
are your current customers or potential customers.
REVIEW AND TIGHTEN YOUR COLLECTION
PROCEDURES. Periodic review of collection
policies
and procedures is always beneficial. Unforeseen
events can never be eliminated, but you minimize
your company's chance of loss by rigid adherence to
your policies.
DISCOURAGE EXTENDED PAYMENTS. Be very
particular regarding which customers are permitted to
use extended payments. Too many will not only
endanger your company's cash flow, but also lead to
undesirable precedents as well.
ACCEPT PARTIAL PAYMENTS ONLY WITH FINAL
PAYMENT COMMITMENT. While partial payments
may
show "good faith," and part is better than none, the
best practice is to acknowledge part payments but
demand a commitment for the balance.
SHORTEN THE COLLECTION SCHEDULE.
Shorten the
period, after a customer is late with a payment, for
continued extension of credit.
KEEP COMMUNICATION OPEN. Make sure you
are
getting through to the right person - the decision
maker. If a visit to the customer is necessary, do it.
RESOLVE DISPUTED MATTERS QUICKLY. If
your
customer is using a dispute over quality of
merchandise or service, price or delivery as the basis
for non-payment, attempt to reach a mutually
agreeable settlement promptly. If a customer is
withholding a substantial payment over a minor
dispute, insist that the undisputed portion be paid
immediately. Your judgment will tell you when you
have exhausted all the internal means at your
company's disposal to negotiate a satisfactory
payment. However, based on the survey quoted at
the beginning of this article, if your efforts do not
bring results in the first 60-90 days, then you should
strongly consider seeking the help of a professional
collection agency.
Enlisting the services of a commercial collection
agency which is a member of the Commercial
Collection Agency Association of the Commercial Law
League of America is a good place to start. These
agencies must all meet the following criteria:
- Be licensed in the jurisdictions in which they
do business.
- Maintain a bond in the minimum amount of
$300,000 for the protection of the companies they
serve. Many member agencies maintain a surety bond
in the amount of $500,000 or more. - Maintain a
separate Trust Account into which all monies
belonging to creditors are placed.
- Subscribe to a strict Code of Ethics
designed to protect creditors as well as debtors.
- Be an established agency in business for
five years or more.
- Provide timely status reports on client
claims.
- Attend educational forums and meetings
throughout the year which provide updates on the
latest rules and regulations pertaining to the
collection industry, as well as supply information on
new techniques and methods to streamline and
improve the collection process.
