By Benjamin DuBay
In today's economy, prudence dictates an effective portfolio risk management strategy to ensure continued and uninterrupted performance of your revenue stream. Fortunately, systems and strategies are available for even the most troubled accounts receivable portfolios.First things first: Identify early those accounts that are not performing. Bad debt is not like fine wine—it does not get better with age. Bad debt is more like a bad investment, and as such, the value depreciates with time.
Enforce the terms of your contract. If your terms are net 30, expect payment within those terms, or at a minimum, get an explanation from the debtor as to when you can expect payment. The informed get paid, while the uninformed remain uninformed. When communication ceases, you should immediately engage a collection agency. The longer you delay, the longer you delay payment.
To limit the amount of bad debt, it is paramount that you gain as much information on your customer as possible prior to granting an extension of credit. Know to whom you are extending credit. Is the store owner, a management company or a broker paying the bill? Knowing who is benefiting from the product or services will assist in recovery. What is the scope of work? When is payment expected? Why would payment not be made according to terms? Knowing why an invoice could go unpaid allows you to work with the appropriate contact to resolve the debt. Evaluate and revamp, if necessary, your current credit and collection policies to help reduce your DSO (days sales outstanding).
Why go to collections?
A professional collection agency can be a valuable tool in helping to keep bad debt off your books. Agencies can help get you the answers your clients—through their lack of communication—haven't provided. Uncertainties can be eliminated with a thorough investigation into the customer's financial state. Most reputable collection firms provide solid credit applications and personal guaranties, and can assist you in developing an effective placement strategy.
A complete review of all contracts, credit applications, projects, principles, etc., provides insight to diplomatically and professionally resolving disputes, as well as to effectuate collections.
Tips to consider
- Keep in mind that not all collection agencies are the same in strategy, effectiveness, communication or support. Key competencies and familiarity with your industry, market and customer—and gold quality service—are essential.
- Your collection agency should be an extension of your company in that diplomacy must be used in effectuating collections. Sales-driven companies cannot afford to alienate a potential client. The relationship has been strained by the customer's failure to comply with credit terms. That is not your fault, and often is not your customer's intention. Frequently, the withholding of payment stems from a domino effect created by today's economy. Unfortunately, the tension bad debt creates can irreparably damage the relationship. Keep an open line of communication at all times.
- Debt collection is a contingency business. Don't pre-pay for collections. Pre-paying eliminates the incentive for productivity—the same productivity that will get you paid. Contingency is typically determined by age. The sooner you place, the less you will spend, and a greater percentage of your bad debt will be collected. Placing an account should cost you nothing upfront, and only when collected.
- When choosing your collection firm, it is equally essential that you check credentials. Certifications with the American Collectors Association (ACA) and state or local organizations lend to the credibility and stability of your collection firm. Ensure that proper licensing and bonding are in place prior to hiring any collection firm.
- Review the software that is used to organize your collections. It is helpful to be able to view all accounts—a sort of spot checking, if you will. Not to say that you need to babysit every account, but you should have access to how your assets are being handled.
Ben DuBay is a managing member of Steinberg, Stearns & Cruz, a full service commercial credit reporting agency. Contact him at 866-686-7254 or visit www.steinbergstearnsandcruz.com.
