Especially in times of financial uncertainty, businesses and individuals want
to preserve capital. This tendency is expressed by delaying purchases as well
as stretching accounts payable. It is common knowledge that the longer
a receivable goes unpaid, the less likely it is to be collected. For this reason,
businesses are becoming more proactive than ever in collecting monies due. Here
are three options for bill
collection.
In-house Accounts Receivable
The first line of defense in collecting payment is company employees who perform
the AR (accounts receivable) function. Both vendors and customers have a
vested interest in keeping a relationship on good footing; vendors want to
continue selling to as many (profitable) customers as possible, while customers
want ongoing access to products or services.
In-house accounts receivable personnel can often work out payment plans with
slow-paying clients who want to fulfill their obligations but are unable to
do so. They can make judgment calls on these accounts based on the needs of
the business and on their knowledge of the customers.
Company representatives can also withhold pending or future orders and can
threaten legal action or to send accounts to third party collection agencies.
However, not all accounts respond to payment plan offers or repeated invoices
or calls.
When to Call in Commercial Collection Agencies
As time goes by and receivables remain unpaid, it becomes increasingly costly
to continue working them--yet doing nothing could prove most expensive of
all. At this point, companies often look to commercial collection
agencies to help them out. Defining the point when it is most beneficial to engage
collection agencies is both a science and an art.
Collection agencies usually
charge 15% to 50% of whatever they collect, depending how old the debt is and
how much work is put in before payoff. Although the
percentage retained by the collection
agencies is known up front, the amount
they will actually collect is unknown. The science of outsourcing collection
efforts lies in running numbers and using contingency theory to find the point
at which it is more profitable to bring in a collection agency than to soldier
on with in-house staff.
The art of choosing the time to hire collection
services involves intuiting
when continued contact with company representatives would cause relationships
with customers to deteriorate beyond the point of no return. At this stage
they may be salvaged by backing off and having a collection agency take over.
Engaging a collection
service earlier in the process often results in more
collections at lower cost.
Debt Purchasing, an Alternative to the Collection Agency
When companies are in a cash crunch or have little or no staff for accounts
receivable work, selling their AR to a debt purchasing company may be an
option. Debt purchasing companies pay pennies on the dollar for the outstanding
debt, but businesses get their money immediately rather than waiting to see
if, how much, and when the debt purchaser is able to recover. Selling debt
provides a low yield, but it is a sure thing.
Sources
The Fair Debt Collection Practices Act
Finance for Non-Financial Managers
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