According to the Bureau of Labor Statistics, the debt collections industry is growing faster than most U.S. businesses. While economic conditions fuel some growth, increased demand for collections services is also due to a lack of sound receivables management practices in general.
This is not criticism of U.S. business. American business leads globally in product management, marketing, distribution, and project management. American companies also recognize the need to outsource other areas of their business outside their core competencies. Truly effective receivables management often requires investment in skilled employees most companies would rather deploy on their core competencies.
A basic overview of historical AR data shows that debtors fall into one of four categories.
1. Reliable – This customer will pay from the first statement. They may even pay without a statement, but I don’t recommend that approach.
2. Distracted – This customer will pay but they are busy. They forget and sometimes they need a reminder.
3. Disrespectful – This customer will pay but not until there is a consequence. This is why most customers, who pay in collections, respond to the first collection letter.
4. Professional Debtors – These customers never intended to pay. They need professional intervention to legally demand payment.
Only about 10% of people and companies fall into the third or fourth category. This means that up to 90% of all debt could be collected without legal action or bad debt write off. It is up to each company to explore inexpensive and customer sensitive methods to encourage debtors in the first two categories to send their payment ahead of others. After all, the first two categories are customers that can, and will, buy again when their current situation improves, if they are treated with respect during their temporary cash flow challenges.
Collection agency costs are high and PR risks are unavoidable. Transferring customers to collections should always be the last effort to recover what may be unrecoverable by other means. The key to identifying truly recoverable debt, and potentially saving customers who could pay in full, is to execute an effective AR management process. This action can also foster good customer relations.
Effective AR management is more than sending statements and transferring customers to collections for non-payment. Two integrated processes that must be considered include 1) Basic invoicing, or point of sale, conditions and 2) Expert AR follow-up after invoicing. This latter process is a mission critical function called pre-collections, or soft-collections, and is available from companies who specialize in these services.
Common Basic Invoicing Conditions:
1. Consistently communicated terms and conditions of sales and invoicing
2. Immediate invoicing, prior to shipping, delivery, etc.
3. Small discounts for paying early, such as within 10 days of invoicing
4. Bonuses or discounts for accounts which sign up for automatic credit card or e-check payments monthly
Unique, Customized Pre-collection Actions:
1. Consistent, yet friendly reminders of approaching due dates as a courtesy, not a warning.
2. Quick, but gentle responses to missed payments, again as a courtesy.
3. A carefully customized, consistent pre-collection letter series offering assistance, not threats.
4. Friendly, scripted pre-collect phone calls, to reinforce the pre-collection letter series.
Every pre-collection action listed in the post-sale process above is positive for the customer, who is likely trying to meet obligations not avoid them. If these actions are well-designed, timely, and consistent, the customer is able to avoid a debt collection notice from an outside collections agency.
Most of the time, as statistics show, the slow paying debtor responds during the pre-collections process and never becomes a bad debt statistic. This not only saves money for the vendor company, but also helps the customer appreciate the value of a continued relationship with a vendor-partner who sees the benefit of helping their customers prosper.