Accounts Receivable Follow Up and Collections Techniques
As 2012 approaches an end, there is a growing concern beginning across America for small, medium and large businesses alike: Accounts receivable management follow up and collection.
Earlier this year, most Americans made plenty New Year’s resolutions to make changes in their personal and professional lives, but few of those changes involved better managing accounts receivable. Far too many bookkeepers and accountants have built a culture where AR becomes a secondary or tertiary function of the financial process.
In today’s economic world, that culture must change! It has been said about change that, “You can survive the old way and you can survive the new way, it is the transition that will kill you.” Transitions are difficult, but vital to any successful collection program and the old way can put your organization in financial jeopardy.
During my many years in the credit and collection industry as a speaker and consultant, I have met thousands of people who work hard at juggling the dynamic functions of the accounting process. They typically have a clear vision of how to invoice customers, manage payables and process payroll, but stumble on the function of managing accounts that don’t pay on time. Although delinquencies might be a small percentage of a company’s annual sales, uncollected bills directly hit the bottom line of any enterprise and can mean the difference between filing a profit or a loss at tax time.
Here are some critical considerations if you are determined to improve your collection program:
Time. There is never enough of it in a typical workday, work week or year. We struggle to keep the flow of business moving and put some functions aside to focus on what really makes us money. However, with AR, we have to invoice on time, follow up on time, and realize that the more time that passes and accounts age, the possibility of collection decreases dramatically. We absolutely must communicate on a timely basis.
Fear of Losing a Customer to Collections. Accounting professionals have to draw the line with the sales team and enforce the need for prompt payment. Don’t fear that the increasingly delinquent customer may go somewhere else. That quite often is a good thing! Some customers make their rounds in your specific industry, perpetuate a culture of incurring debt, and move on to another product or service provider. Make the decision early to escalate collections before your opportunities diminish.
A Clear Collection Plan: The only way to orchestrate a successful collection program is to develop a policy embraced by all constituents in the organization that clearly outlines what steps will be taken at each stage of delinquency. When do you invoice? When does the late notice get generated? When do you assess late fees and interest? When do you make phone calls as follow up? When do you discontinue orders and service to the customer? When is it time for outside collection assistance? A clear collection policy will ensure that you never review an account and question, “What should I do next on this account?”
Be Proactive not Reactive:Most financial professionals react to unpaid bills with a variety of solutions they feel might motivate customers to pay. Any good collection policy will help you decide on your calculated steps and actions. However, many organizations are finding success in being more proactive with their approaches. When there is the slightest warning that a customer is paying later than usual tap into data that might help you determine their financial stability. Run a D&B profile on the commercial customer and consider scoring consumer accounts to get a snap shot of their overall financial soundness. They might be crashing and burning with other creditors, but continue to pay you as your product or service is vital to their existence. Get a handle on where your customers are headed before it is too late.
Outsource: Every creditor should seek outside assistance when the agreed internal steps to collection have expired and recovery is doubtful. Third-party debt collection firms are more appropriately called “Accounts Receivable Management Firms” today. They can help you manage your internal program by executing notices and phone calls on your behalf as well as take assignment of your accounts that have been written off the books as uncollectible. You will typically pay them a low management fee or contingency fee for early assistance and only a contingency fee (no collection no fee assessed) for charge-off accounts. Partnering with a good collection organization can add to your bottom line.
To find collection firms in your region inquire with your local chamber of commerce or contact ACA International, Inc., the trade association of credit and collection professionals headquartered in Minneapolis, MN. There is a comprehensive list of members across the country as well as internationally on the public web page. And, relative to time, you should never wait until the end of the year to focus on collections and make decisions on further action. An annual dump of accounts will produce far lower results than an ongoing, calculated placement of individually aging accounts monthly with your collection partners.
One of the unfortunate cultures in the accounting industry surrounds the fact that many professionals lack the opportunity to compare notes with other bookkeepers, benchmark effective and ineffective practices, and simply know whether their collection program is actually working according to industry standards. It is important to understand that virtually every business in America has some level of delinquency with customers unless you are in a 100 percent cash business.
The third-party debt collection industry continues to grow annually in assisting creditors recover past due funds. In a study conducted by Ernst and Young for ACA International in 2012, it was announced that the third-party debt collection industry recovered more than $55 billion dollars for U.S. creditors in 2011. An unfortunate statistic is that the average success rate of this industry is well under 20 percent of accounts placed for recovery, a fact that underscores the need to develop a comprehensive strategy internally to collect as much as possible prior to outsourcing.
As we approach the end to 2012, don’t be thinking about your list of resolutions for your accounting functions. Think instead of your new agenda of SOLUTIONS for 2013 that will enhance your recoveries and give you peace of mind!