Tips for Collecting Receivables

How to get the money flowing again, in spite of the economic slowdown.

If you are reading this, you are already in the top 20% of business managers/owners who have recognized how key the receivables cycle is to any business.

As our market enters this slowdown, it is vital to adjust our operations to maximize profits. The rules have changed, and the lagging 80% are still playing by the old rulebook.

Liquidity is the new Leverage.

It has been a credit free-for-all for the past few years, so long A/R cycles have not been a problem. Businesses can just borrow any working capital necessary in order to stay afloat, pretty inexpensively.

It has been easier and cheaper to just let the money come in slowly, and borrow to make up for it.

That is no longer the case. As banks hit the brakes on lending, it has squeezed consumers who no longer have open home equity lines, or credit cards. In response, these consumers tighten their own spending.

Businesses are getting pulled from both ends. Many banks have frozen all commercial lending to wait out this economic storm, and since consumer spending is down, your sales are likely lagging as well.

The catch phrase of the 90’s was “other people’s money,” leveraging a small amount of assets with a large amount of borrowed capital to bring in large returns.

This decade, the key is “positive cashflow”. Being able to cover all costs with profit from operations rather than borrowing, and funding future growth from within.

But how?

Every business, no matter how complex, operates to create a margin between cost of goods (or services) sold and the price the buyer pays. Once this margin is determined at the point of sale or time of service, it cannot grow. It is set.

It can, however, decrease. As time goes by, that number gets smaller as your business spends money on A/R personnel, phone calls, letters, stamps, overhead, etc. A recent Wall Street Journal article reports the average cost of internal collections at $15-20 per round (one phone call, one letter) when all overhead and employee time is factored in.

Also, as accounts age, there is a predictable rate at which their collectibility decreases. The newer the account, the more likely the debtor is to pay. As accounts age past 60 days and then 90 and 120, they become extremely difficult to recover, and require huge amounts of time and resources to do so.

If you are extending credit, if you are billing the customer rather than collecting payment immediately, you have, by default, created a separate profit center within your own company. You now have a completely separate service that you are providing (one of Credit Provider), in addition to your “main” business. But this profit centers’ job isn’t to create new profit, but rather, to protect the profit from your core business.

How much work do business managers put into managing their sales numbers and costs? Quite a bit. But how much attention is given to this business-within-the-business? Not enough.

How do we protect the margins in this sub-business?

Yesterdays business model approached accounts receivable as two distinct activities: Internal and External. Internally, businesses used traditional means to collect for as long as possible before throwing those accounts into the External effort, essentially expecting nothing to come from it, and anything that did would be viewed as a bonus. (The Salvage Yard approach)

Today’s progressive A/R models make no such distinction. There is an external element, but it is fully integrated into the internal operation.

The biggest mistake most businesses make is to focus an inordinate amount of time and resources on accounts that are older than 60 days, and many times older than 120 days!

By focusing on the old accounts, you are letting the new accounts sail right through the early stages when it would be very easy to collect the full amount due. These “young” accounts bleed money out of them every day they are not collected.

Unfortunately, this is a cycle that is difficult to break, because if you do not collect it yourself, you have to hand it over to a traditional collections agency whose fees eats up the profit margin that you are trying so hard to protect. In addition, their recovery rate is typically very low, between 12-17%.

Principals for collecting young accounts (15-45 days past due)

The “Pleasant Portion”

The first principal to implement is this: the younger the account, the easier it is to collect. Many firms spend quite a bit of time on older accounts, and not so much on newer balances. The opposite should be taking place! The amount of time and energy you apply to these aging accounts is much better invested in the young accounts where you can still catch a large percentage before they get too old.

The second principal is that it is very easy to throw away a “balance due” letter, but very difficult to tell someone you aren’t going to pay. That is why any successful accounts receivable plan must include regular phone calls to everyone with past due balances. Get them on the phone, and get them to pay. Even the most stubborn debtor has a difficult time with a real live person on the other end, asking in a pleasant way, just how best to work out a payment.

Principles for collecting aging accounts (60 days+)

“Firm Portion.”

These debtors have demonstrated that they are going to be tougher nuts to crack, and have not responded to gentle reminders.

You must balance the necessity of explaining the firm “consequences” to unpaid balances, without resorting to outright threats that will alienate this customer. Reminders like “In order to keep you as a valued client, we would like to set up a payment plan to bring you current.”

The main rule here is, do not get off of the phone without setting up a payment, one for on the spot, or for a future date. Get a check number, credit card number, anything that will allow you to process payment. Again, do not get off of the phone without getting this information, this is difficult for many people, so be sure to have someone with the right type of personality making these calls.

It is also important that you do not imply or explicitly threaten any course of action that you are not able to follow through on. The Federal Fair Debt Collections Act is very specific and inflexible on this point. Be sure that all your correspondence follows the requirements of this act; if you are out of compliance the consequences can be severe.

The Key:

At the crossover stage, the 45-60 day late stage. You have a crucial decision to make. Continue to chase these accounts as they age to try to catch what may be caught, or turn them over to a collections firm?

The problem is, most collection firms treat your relatively young (by collections standards) debts as though they are 120-180 days old, trickling a few letters or calls here or there, catching what they can, and throwing the rest in the trashcan.

If you do it yourself, and devote all your time and energy to these accounts, you lose out on what you would be saving by catching the younger accounts before they become difficult cases.

So what’s the right call?

Outsourcing.

Instead of turning to a “salvage yard” collections firm, there is an emerging type of collections firm that specializes in the early to late stage collections, but operates, in effect, as an arm of your own Accounts Receivable department.

These firms operate on low, fixed fees and instruct debtors to remit all payment to your firm directly.

Through specialization, these firms are able to keep the cost of collection extremely low, and maintain very high success rates.

Charge for it.

You will need to check your state laws, but in most areas you are permitted to charge the customer if the account must be placed into collections. This must be posted ahead of time, but if you are able, then you can pass the cost of the outsourcing along to the client.

If you do this early enough, the collection firm will still have a high probability of recovering a large portion of what is owed, and if the customer is covering the fee, then what you have done is re-focused your internal activity on younger accounts, increasing the collection percentage, with no additional cost because it is the staff you already have in place, and increased the outsourced collection percentage, at no additional cost, because the customer is absorbing those fees.

If you are able to implement these keys, you will see your profits growing once again, because they are being protected by you’re A/R processes.

For more information on progressive collection methods and firms that operate as progressive A/R outsourcing units, visit

www.cashrecoverynetwork.com

You will find valuable reports such as,
What your Collections Company Doesn’t Want you to Know
and The 6.5 Questions I should be Asking my Collections Company

Bob Blackburn
Managing Director
The Cash Recovery Network
www.cashrecoverynetwork.com
bblackburn@cashrecoverynetwork.com
© Cash Recovery Network 2008