Targeted Collections (#55)
/In this podcast episode, we discuss several methods for concentrating your collection efforts in order to maximize the amount of cash collected. Key points made are noted below.
Collections Strategy
The strategy with collections is to pull in the largest amount of money for the minimum amount of effort – and in the shortest possible amount of time. But, keep in mind that you can’t achieve all three parts of the strategy at the same time – at most only two out of three. You’ll see this as we go along.
Focus on the Largest-Dollar Items
First, consider that first guideline of collecting the largest possible amount of money. This means that you don’t waste time collecting small dollar items, or that you only use low-cost collection techniques for those items. For example, the most expensive type of collection activity is using a collection specialist. These people have to spend time collecting information about an overdue account, reviewing past collection records, and then contacting the customer. This takes a lot of time. In fact, the cost of just one call may be higher than the amount of the invoice. So, what do you do? After all, it seems crazy to not even try to collect a small dollar invoice.
Dealing With Small-Dollar Invoices
You have two choices. First, use the accounting system’s automated dunning letter feature, and crank out a nice, inexpensive letter or e-mail reminder every few weeks. Second, if the collection staff has completed collection calls to larger-dollar customers, then have them call about the small-dollar items.
After all, many collection employees are salaried, so despite what I said earlier, there’s not really any incremental cost to having them contact small-dollar accounts. It’s just more effective for them to contact larger accounts first.
If neither approach works, then don’t waste any further effort. Dump these small accounts onto a collection agency, and write them off.
So in this first scenario of collecting low-dollar amounts, we’ve achieved only one of the three parts of the strategy, which is to expend minimal collection effort. But this is OK, because the dollar amounts are also minimal.
Collect Large Amounts Fast
Now let’s go back to the collection strategy. We’ve addressed small overdue items, so how about large ones? This is where we focus our collection resources. But now we have a trade-off of wanting to use the minimum amount of effort, but also of collecting large amounts of cash within the shortest possible period of time.
In this case, we’ll forget about minimizing collection efforts, and instead focus everyone’s attention almost entirely on bringing in the cash as rapidly as possible. There are lots of ways to do this, but keep in mind that you only use this level of activity for the really large outstanding receivables. What I’m going to describe next requires a lot of effort, and it’s just not cost-effective for smaller collections.
First of all, contact the customer before the invoice is even due for payment, to make sure that the payment is scheduled. If not, there’s probably a hang up somewhere in the customer’s payment process. This calls for repeated communications right away to correct the issue. Feel free to involve your salespeople. They have different contacts in the customer’s organization than your collections people have, so use those contacts.
And speaking of the salespeople, e-mail them a receivables aging report once a week, preferably for only those accounts for which they’re responsible. If they’re staying in close touch with their customers, they might spot problem invoices really early, and let you know.
If the customer happens to be a new one, you can also use this early contact period to go over your preferred payment procedure, so they know exactly where you want to have payments sent. And you can follow that up with a letter that outlines the procedure in more detail.
Now, along the same lines, the collection manager should review the customer complaints database every day. This is a really good way to spot upcoming collection problems, because the customer service department usually hears about problems well before the accounting department does.
And the same logic applies to the deductions database, if you have one. This is where you can find the types and amounts of deductions that customers have taken in the past, and the reasons for those deductions. If a customer has a history of subtracting large deductions from their payments, this is a good place to find out why.
So far, we haven’t even reached the payment due date, but we should have a pretty good idea of any potential problems.
The next step is to do whatever it takes to accelerate the receipt of payment from the customer once the due date arrives. For example, you can volunteer to have a salesperson or a courier pick up the check, or have them send it to a lockbox. Or you can authorize the customer to use your corporate FedEx or UPS number to send the payment by overnight mail. Or they can pay by credit card. Or, of course, try to get them to send you an electronic payment, or to authorize you to debit their bank account with an ACH transaction. In short, do everything possible to bring in the cash exactly on time.
But even if the cash comes in, it doesn’t help your collections staff unless they see the receipt in your accounting system. Logging in cash receipts can be a bottleneck area, so make sure that all receipts are logged in the minute they arrive. This keeps collections people from wasting time calling customers about invoices they’ve already paid.
Now at this point, the due date should only be a couple of days in the past, but you should already have a good idea regarding which invoices won’t be paid on time – and more importantly, why they aren’t being paid. If the issue is that the customer has no money, then the collections staff can go through the usual process of setting up a payment schedule, using financing, getting the goods back, and so on.
For this type of routine collections work, you definitely want to assign your best collections people to the largest dollar accounts. Some people just have a flair for working with customers and getting cash in the door faster. If you have people like this, then by all means target them where they have the greatest impact.
Unfortunately, the real problem is when the customer won’t pay because some other department of the company itself is causing the problem. For example, the deliverable was flawed or incomplete, or improperly engineered. There are lots of reasons.
And this is where a lot of collection departments don’t know what to do, because the collection manager doesn’t want to bug some potentially powerful department managers who very likely outrank him.
The solution is not to shift the problem up to the controller, even though he may have more power to deal with the problem. If you do this, the controller just gets buried with the details of following up on an unending stream of internally-generated collection problems.
The much better method is to set up a standard process that all of the department managers agree to in advance, where the collections staff shares problems directly to their counterparts in the other departments. If an issue isn’t resolved fast, then the process automatically escalates the problem to higher and higher levels of management. Also, the performance reviews of these managers should be partially based on their ability to resolve the underlying problems that cause collections to occur.
If you use this method, then the entire company gets behind the collection effort, rather than letting a group of perpetually understaffed and overworked accounting people try to fix everything.
And this brings us back to the collection strategy. Again, for large-dollar collection issues, you want to bring the full attention of the collections staff to bear on it, and this extends to the other departments. But it does not mean that you involve other departments in the collection of small dollar items, because that is not cost effective. So, if you set up an in-house process for having other departments assist in collections, only use it for the largest collection problems. Don’t abuse the system with small stuff.
Also, keep in mind that some collection techniques are not effective for collecting these larger-dollar invoices. For example, don’t bother with a dunning letter or an automated faxing system. Those solutions are designed for small-dollar collections, not large ones. Instead, use the personalized approach that I’ve described above.
When to Use Collection Agencies
Finally, what about collection agencies? Normally, you only bring them in after some time has gone by, because you want to try every other technique in order to avoid paying their collection fee. However, let’s get back to the collection strategy. A key target is to bring in cash in the shortest possible amount of time.
So, if you have a large overdue account, you’ve tried all normal in-house collection techniques, and nothing works, then don’t waste time.
It makes no sense at all to wait six months and then shift the receivable to a collection agency. Instead, make the decision as soon as possible, and put the receivable into the hands of someone who can possibly make a difference.
Parting Thoughts
To summarize the targeted collection strategy, picture yourself using a broadside from a battleship to collect the largest overdue amounts, and only the most minimal efforts for small accounts. Broadsides tend to win battles fast, but they also need a lot of gunpowder, so they can only be used sparingly. The same principle works for collections. Focused activity works much better than spreading your efforts too thin over too many invoices.