The Debtor’s Psychology

A debtor figures that if their account is 180-360 days old, they’ll never have to pay it, and certainly not the full amount. Chronic slow-paying customers can be re-trained to be profitable, long-term relationships, but they require constant attention so they do not age out to become bad debts. With a little effort, you can cure customers’ slow payments.

  • Many large companies use software to optimize their Accounts Payable – they track how well you follow up and will pay you accordingly.
  • Small companies follow the same practice without the software – they pay you based on how you train them to pay you.
  1. If you allow customers to pay late, they will pay late, and your cash flow suffers.
  2. Past-due customers will order from your competitors rather than risk your asking them to pay up. Being a nice guy costs you sales.
  3. If you ignore delinquencies too long, they will become your bad debt ex-customers.  You lose both ways.
  4. Debts are 200% more likely to be collected if assigned for collection at 90 days vs. 360 days.

This is a zero-sum game: if you do not collect what you are owed, your customer will pay another vendor who was more aggressive in their collection follow-up. Your customers will learn from your practices. Unfortunately, many companies wait until the customer is far past due before taking action.

Routine Accounts Receivable Collection is a Production Job

Like many repetitive processes, accounts receivable collections is a “production” operation and can be “re-engineered” to improve cash flow, reduce DSO and slash the disputes that result from letting unpaid accounts go stale.

Cash flow is the lifeblood of every business, and success or failure depends largely on how accounts receivable are managed. Collecting receivables more quickly enables you to reduce bank borrowing, invest more in growth, and improve profits. Our experience is that delinquencies can be dramatically reduced – cut in half, or even better with some planning and effort.   Here are some basic ideas to implement in your organization.

1. Credit and Collection Policies

Do not leave it to individuals to decide policies and rules about how frequently the customer should be contacted for money and what the proper collection protocols should be.

Every company needs a credit and collection policy that provides the framework for the job.  Management should develop this policy and detail the criteria and tools to be used (restricting credit, management scalation, collection agencies, etc.). Even a one-page credit and collection policy may be enough if you are a small company. Larger companies need to go into much more detail.

The customer should receive a written explanation of your credit and collection policies, outlining the business rules. Make it part of your Credit Application, but if not, email it afterward so they understand your business rules.

2. Prioritize Your Work

Prioritize collection activity so you are working on the receivables that offer the greatest cash flow payback. If you have an advanced system, you can also employ risk or payment scoring to assign the accounts needing first attention. You may also consider outsourcing all or part of the past-due collection function to a qualified agency, which usually produces more focused and better results and is often less expensive than full-time staff.

3. Collection Performance Standards

Most people do not like to ask for money. Consequently, left to their own devices, they may not call with the consistency required for an effective collection function. Your people need performance standards for monthly cash flow, DSO, delinquency percentages, number of calls and contacts, etc. If you track it, it will get done.

4. Assign Goals and Track Results by Department and Collector

Collections is a “production” job; you need to develop clear goals on cash and delinquency targets for the month and the number of daily calls and contacts (since you need to have all customers touched). Daily reporting should include calls made, promises obtained, disputes resolved, etc. Monthly reporting should roll up the daily results, plus report the financial results – Cash Collected, DSO, Delinquencies, etc. Of course, the department goals must match up against the corporate objectives of your CFO.

5. Credit Application and E-Signatures

Use an automated credit application system incorporating your policies and business rules,  and utilize e-signatures to have an officially signed agreement. This will save you countless hours that you can spend collecting. Sign up with one of the several signature applications, and forget faxes. This accelerates and simplifies signing agreements, including settlement agreements, promises to pay, etc.

6. Collection E-Mail Templates and Collection Call Scripts

How much do you want your staff to set their own rules? It depends on an individual’s experience, but generally, the answer is “little to zero.” Do not leave it up to staff to develop their individual communications standards.

This includes collection letters, voice mail messages, and collection scripts. Standard templates meeting best practices should be developed and used by all. We advise skipping written snail-mail letters, except when you must give official notice, certified mail, etc.

7. Make Paying Easy

Offer your smaller customers multiple ways to pay, including e-check, ACH, and credit cards. 

8. Contact Data

Your customer contact data should always include the email addresses of your payables contact, controller, and management.  If the customer is a small company, you should also have the owner’s cell phone. This information can be added to your new customer credit application. A surprising number of creditors do not have current information on who to contact to resolve collection problems.

9. Systems and Workflow

If you have sizable receivables or many customers or still use spreadsheets, you must consider workflow automation to manage collections and routine tasks. See Carixa for an idea of what a comprehensive, integrated “Software as a Service (SaaS)” system can do for you. You are guaranteed faster collections, lower DSO, fewer delinquencies, and reduced overhead if you deploy powerful collection software. As with all SaaS offerings, it is internet browser-based, so there is no software to install or hardware to purchase.

10. Collection Cycle

Don’t wait as long as your competitors to make the first collection contact; use email to your advantage. Get the money first through early Intervention. If a large invoice will be coming due, it’s worthwhile to call before the due date to solve any problems delaying payment. And don’t be shy about sending “friendly reminders” at even five days.

  1. If you do not receive a response to a call or email, follow up every two or three days until you get a response.
  2. If your debtor is a smaller company, escalate a more serious collection matter by emailing or calling the business owner.
  3. If collection delinquency is serious (regardless of the size of the customer), call an executive-level person (say, CFO). They do not like receiving these calls and will handle the problem.
  4. Do not take them off the hook with unfulfilled promises. Call if the funds were not received the day they agreed to pay.
  5. Expedite all communications. When sending invoice copies or other documents, scan and email them. Email eliminates the usual excuses, and you are assured that it’s reaching the intended party.
  6. Use credit holds when an account is delinquent without a firm promise to pay.
  7. If you are getting nowhere, assign the account to a collection agency and move on to current accounts receivable.

11. Train Your Staff

A bit of training and role-playing can improve your collection effectiveness dramatically. Outside training, help is worth an investment since the benefits will be long-lasting. This includes the Fair Debt Collections Practices Act. Although the FCPA doesn’t usually apply to B2B transactions, always remember to comply with the FDCPA when dealing with consumers.  Regardless, commercial collections and consumer customers should always be handled professionally and consistently, which reflects your corporate culture, even the few abusive customers.

12. Using Collection Agencies and Outsource Services

Professional receivables organizations such as Leib Solutions offer First and Third-party collection services and are an essential part of receivables management.

  • “First-party” is another name for day-one outsourcing of all receivables under the client’s name. Generally, first-party is performed for a low service fee, often per invoice or a low percentage (even under 1% if your volume is high).
  • “Third-party” is the traditional collection agency service when accounts get old—usually, no collection -no fee.

Uncollected invoices will eventually be written off as bad debts. You should assign them to a qualified collection agency while they are still collectible.

It’s shocking how many companies wait until there is little hope of collection, telephone numbers disconnected, or even bankruptcy before calling a collection agency. This is evidence of a failed collection policy. The old saw that “better to get 75% of something than 100% of nothing” applies here. It’s just common sense.

The first step in improving your company’s cash flow is to take the first step and lay out a plan of attack. If you want some advice, contact us. We will be happy to help in any way we can.