Debt collection strategies
/Debt collection strategies are needed to maximize the efficiency and effectiveness of the collections team. Ultimately, the result should be more collected funds in relation to the collection effort expended. This is an especially important issue when the accounting department is facing a reduction in its budget. Debt collection strategies are different from the more tactical methods used to actually contact customers regarding overdue payments. A suggested set of debt collection strategies to consider are noted below.
Restrict the Granting of Credit
Debt collection begins with a decision about how much easy credit a company wants to grant its customers. This is a management decision that should involve a discussion about the impact on bad debts and the investment in accounts receivable. Management may elect to restrict customer access to credit when the economy is declining, on the grounds that customers will be less able to pay their bills. Conversely, management may increase customer access to credit when the economy is rebounding, on the assumption that customers will have more cash to pay their bills.
Send Invoices on Time
Customers cannot pay invoices if they have not yet received the invoice. Consequently, a major concern for the accounting staff is to issue invoices as fast and accurately as possible, once the related goods and services have been provided to a customer. This may include the use of electronic invoices or overnight mail delivery services. The controller should be focused on spotting any delayed invoice issuances, and correct the reasons for these delays.
Prioritize Collections
It usually makes the most sense to direct the collection staff at the largest invoices, since the return on their time is greatest. An alternative is to use a third party credit analysis firm to determine which customers are in the best financial health, and target those invoices payable by them.
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Locate Debtors
Employ a skip tracer to locate debtors who are no longer at their last-known address. Paying a small skip tracing fee is much more efficient than having a collections person set aside time to perform this task. Paying a skip tracer is most cost-effective when the amount owed is relatively large.
Use Collection Tools
Part of debt collection strategy is deciding which collection tools are to be used. For example, will the company accept converting an overdue receivable into a loan? Will it accept returned goods? Should it take customers to court? These decisions may be based on the company's need for working capital, how rapidly its products lose value, and so forth.
Maintain Communications
The preceding activities may not result in an immediate payment. When this is the case, consider continuing to communicate with the customer. Doing so may present opportunities for payment at a later date, especially if the customer’s financial circumstances improve. However, an ongoing series of communications takes time away from other debt collection activities, so this approach may not make sense when the outstanding debt level is relatively low.
Hand Off to a Collection Agency
Define the point at which invoices are to be handed to a collection agency. There should be a definitive point at which this transition takes place, such as after 90 days or after the fourth customer contact. The main point is to avoid dragging out the handoff, since doing so results in a stale receivable that is much more difficult to collect.
Parting Thoughts
Whatever the decisions may be regarding the preceding strategies, be sure to put them in writing. Then make a note in the department calendar to revisit the documented strategies at regular intervals to decide whether any changes should be made. A shift in strategic direction could be triggered by a change in general economic conditions or the competitive stance of the company.