In tough economic times, it is reasonable to expect that those enterprises that extend credit to customers, whether individuals or other enterprises, may have a tough time collecting the money owed. Therefore, it is necessary to have a systematic debt collection process in place, for both good times and bad, that anticipates that some accounts will go past due, and is deliberate about collecting them when they do.
Extending credit is a standard practice in many industries. Although accepting credit and debit cards as means of payment for retail transactions is common, many enterprises extend credit in industries where trade debt is normal practice.
For example, manufacturers, distributors, and wholesalers extend credit that enables their customers time to generate cash flows from sales to pay for the products sold. Payment terms may vary from ten to thirty days, and discounts may be offered as an incentive for prompt payment. For example, “2% 10 net 30″ means that a customer can take a two percent discount if they pay a supplier within ten days, or pay the entire amount in full within thirty days.
When sales slow down, working capital gets tied up in inventory, and the payables of customers start to age. Hence “net thirty” can become “net forty five” or more very quickly. Although suppliers may require personal guarantees from lifestyle business enterprise owners, enforcement can be tough.
Even those enterprises that accept credit and debt cards may have to extend credit from time to time, especially if they are providing emergency services. For example, dental practices and automotive repair shops are prone to extending credit to customers in dire situations even though they may accept cards. Such situations include toothaches, or broken down cars used for work. It is hard to refuse a customer who is in pain or is immobile, even if they cannot pay right away.
It is important for an enterprise to keep on top of its accounts receivable in both good times and in bad, and to use early problem prevention practices through a systematized approach to debt collection. The more debt ages, the harder it is to collect, especially if collection efforts are started late.
Handling past due accounts can be an emotional time for both creditors and debtors, and can get out of control. Therefore practices should be developed and enforced rationally to avoid embarrassments.
Characteristics of a debt collection system include:
Knowing the law – in the United States, the Federal Fair Debt Collection Practices Act and the Fair Credit Reporting Act extend certain rights to consumers and requirements of third-party debt collectors and credit bureaus. Many states have similar laws and regulations. In house collection activities may be subject to such laws also.
Ensuring that policies, processes, and performance reporting practices are in place for accounts receivable. These practices include ensuring that all customers have credit limits and understand exactly what credit terms are being extended to them; aging the receivables portfolio, and beginning collection efforts as soon as accounts become past due. It is important to know the ratios of amounts past due to total owed by period, and the historical delinquency rates, so that trends can be monitored, and corrective action taken quickly.
Having an effective process in place for contacting customers promptly and frequently whose accounts are delinquent, and ensuring that it is enforced. Employees generally do not like to contact past due customers and ask for money, and therefore accounts may fall further past due. Hence, it is important to monitor the frequency and recency of contact and the results. Procrastination does not get debts paid.
Using written communications with language that is compliant with laws. Letters may start out diplomatically and assume that the delinquency is an oversight. Subsequent letters may use stronger language that suggests that further action may be necessary. Letters must not contain threatening language, and must not say or imply anything that cannot or won’t be done, such as the use of collection agencies or legal action.
Knowing when to escalate – policies should state exactly when third-parties, such as attorneys and collection agencies are to be used, especially as their intervention can motivate debtors to pay. Such parties should be preselected, so that the turnover process is straight forward. The terms and conditions of using such parties should be clearly understood in advance, including costs, success rates, and impact on future customer relationships.
When the debt collection process is systematized, customer relationships can be managed and preserved because everything is conducted in accordance with policy.
Effective accounts receivable management is an enterpriship (entrepreneurship, leadership, and management) competency.
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