What is a Cash Collection System?

How the new economy is driving business to redefine collection methods.


Do you remember the show The Little House on the Prairie? I saw a re-run on a station my kids were watching, and it took me back to when I used to watch it as a kid myself. You know the show; it follows young Laura Ingalls’ life, as she grows up in a frontier town with her family in the late 1800’s.

What struck me was one scene in particular when the schoolteacher was at the general store, picked out some dry goods, and asked the shopkeeper to put it on her account. “Sure thing” was the reply.

No credit check, or application, not even a signature.

He took her at her word because he knew her. His kids were in her class. They probably knew all the same people, attended the same church on Sundays, and so on.

“Things have really changed.” I thought to myself.

But have they really?

As business owners we know very few of our customers by name, and even those we know, we probably have very little contact with outside of our business. We don’t know their kids, or friends, or what they do on the weekends. But, if we are invoicing for goods or services, we still let them tell us “put it on my account.”

No credit check, or application. We do get a signature (at least we’ve learned something)

This leaves us in an interesting position. We have taken them “at their word” that they will pay us, but we really don’t know if they will.

As a business owner or manager we devote huge amounts of thought, time, and energy to creating a profit through our business. But, then we literally give our product or service to the customer with little more than a handshake as a promise to pay. We are on the line for not only the profits we’ve earned, but also the cost of the goods or services they have consumed.

So, don’t extend credit, right?

Tempting, but wrong.

In many industries this just isn’t possible, and even if it is possible for you, it is not advisable, since by cutting off credit, you are likely to lose those customers that typically rely on it for your services.

The answer is a Cash Collection System.

Traditionally, businesses have worked accounts internally as they go from 15 to 30 to 60 days late, all the way up until 120 days late or more. Sending letters, calling, reminding, begging for payment.

Once the business gives up all hope, it throws the account into the salvage yard collections firm. You know the type. Instead of giving you money for old cars or cans or copper pipe, they give you money for your old accounts.

Usually they net back around 10 cents on the dollar to your business. That is pretty good since they are making something out of nothing, right?

Wrong.

The lie these salvage yard collections firms rely on is just that: that these accounts are “garbage.” They do what they can (which isn’t much) and keep a huge fee for the trouble.

And, just like the days of the frontier shopkeeper, the days of this salvage yard collections firm are gone.

Progressive businesses have moved towards the Cash Collection System model.

Instead of repeated and extended attempts to collect on the accounts internally, waiting until there is very little chance of getting a significant payment, today’s A/R managers are integrating an external Cash Recovery company into their internal operations.

This is why it works:

Accounts that are less than 30 days old are very easy to collect, and should remain the focus of internal A/R efforts. 30-60 days late starts to get difficult, but is still within the scope of what your staff should be focusing on.

Once the 60-day mark is reach, however, the account should be placed into the cash collection matrix.

Instead of a traditional contingency fee collection company, these progressive companies charge a flat rate and operate as an arm of the A/R department. You are able to submit accounts online, and track the progress. All money should be sent to you directly, with nothing taken off the top as with salvage yard collections agencies.

Your business is able to afford to submit accounts much earlier in the cycle (60 days instead of 120 days or later), because the account balances aren’t getting swallowed up by fees. And, because you are able to submit the account earlier, the recovery rate is much, much higher because they haven’t gotten too old to collect effectively.

It has all the advantages of doing it yourself (low cost, easy to manage, and effective) with the advantages of a true collections firm (specialized service, compliance with the Fair Debt Collections and Practices Act, and the ability to report to all three major credit reporting bureaus.)

Further, because you have handled these accounts through the cash collection system, you can focus 100% of your efforts into the pre-60 day late accounts, increasing the collection rate there, as well.

The best part is, if you live in a state that allows you to charge for collections (like my state does, Virginia), then you can pass the small fee that is charged for this service right on to the customer, significantly raising both pre and post 60 day late collections without any additional cost! That translates into higher profit to your bottom line just by re-defining roles and putting in place an outsourced cash recovery system.

This truly is the new way to handle collections, and this approach is going to become increasingly crucial as the economy continues in uncertainty.

Maybe we can get back the same confidence that shopkeeper had, knowing that we have the system in place to back up the handshake.


Bob Blackburn
Managing Director
The Cash Recovery Network
www.cashrecoverynetwork.com

© Cash Recovery Network 2008