Business Services AR Collection Service Collections Articles Handling A/R Delinquency
Handling A/R Delinquency
A SURVIVOR'S GUIDE:
A/R Management in this New Economy
Handling A/R Delinquency
If you are a business owner you are surely aware of the impact A/R has on your bottom line. Traditional estimates are that for every dollar you have as a "non-performing" asset, you would need to bring in three dollars in new sales to offset its effect.
Economic times are very tough today and in turn your sales efforts may not be generating the results you enjoyed in years past. These two issues can create the perfect storm. Couple this with the tight credit market and issues such as these can keep you from expanding your business, or even worse.
The easiest way to go out of business is through an escalating loss of revenue.
The easiest way to go out of business is through an escalating loss of revenue. Revenue is what you use to pay all your bills. A/R is nothing more than revenue that has not been received yet. A/R obviously poses risk to the company to which the money is owed. It is a calculated risk in may cases when it is a result of a credit extension policy.
If the A/R is created by something like a bad check or charge back, it is obviously more serious. In either case, controlling A/R delinquency is of paramount importance to the financial well being of your business.
Identifying an A/R Problem If you have anyone who is over 60 days in arrears and they aren't returning your calls you may have a serious problem.
Look at your aging report. If you have anyone who is over 60 days in arrears and they aren't returning your calls you may have a serious problem. In essence the debtor is using your cash flow to continue their operation.
If they have less than honorable intentions and feel they can do this without any consequences they will continue to ignore you. Keep in mind they are paying some of their obligations, but you are not a priority. They have determined who they need to keep happy in order to stay in business. It's the old "squeaky wheel" adage.
Leaving more messages on their voice mail is probably not going to modify their behaviour. There are A/R issues that may call for an aggressive approach, and those where some empathy and understanding are more in order.
Reasons Good Clients Go "Bad"
Cash Flow
Cash flow and a dispute will be your most common non-payment reason.
Often times a customer's business can experience a temporary cash flow problem. Your willingness to work with a customer during these times can lead to a good long-term relationship. They will appreciate what you did for them when they needed your help and patience.
At the same time you need to be reasonable and fair to your business and require your customer to show cooperation.
Demonstrate that you understand their situation and that your company has a policy to work with good customers who experience temporary cash flow problems. Let them propose what they are able to do. Get details of where this money will come from. If the timeframe is reasonable, then accept the plan and confirm it in writing and ask that they acknowledge the plan by signing it as well. You will need to use your judgment on what is reasonable.
The amount of the invoice and history of the customer are also variables that you will need to consider. Usually plans that get you paid over a 2 to 6 week period, which provide for some money now is reasonable. It is usually best to ask for post dates representing future payments.
If the plan is unreasonable, let your customer know that your policy requires further verification if you are to consider a longer payment plan. Get the name of other creditors who are not being paid or who have accepted longer plans so that you can validate your customer situation.
Disputes Disputes that are brought to your attention early are more likely to be valid.
Disputes that are brought to your attention early are more likely to be valid. Regardless of when your customer raises a dispute, it is important to listen before responding. Often a dispute is only a portion of the invoice so your focus should be on getting the undisputed portion paid immediately while you investigate the disputed portion.
Quick attention to a dispute is key to maintain customer good will and getting paid. It is also a quick way to determine if the dispute is just a stall tactic.
One version of the dispute that you will need to be careful about is when the customer claims the salesperson told them something about payment terms or price. You will usually know if this is something that could have happened based on your experience with a particular salesperson.
As always you will always want to explain your policy, but at the same time determine if what the customer is saying has any validity. You will need to use your judgment but sometimes it is best to make a reasonable modification to this invoice but clearly explain future policy or pricing.
If the dispute is not valid then calmly explain to your customer your position and request payment.
In the event of a cash flow issue or dispute, there will normally be communication between the parties. A customer with a legitimate dispute will almost certainly be willing to talk with you in an effort to resolve the matter.
The customer who is experiencing cash flow issues my be somewhat embarrassed but will also most likely be willing to discuss the situation with you in an attempt to work out an alternate arrangement.
If the customer is belligerent or not willing to discuss the delinquency it may be an indication that they have no intent of honoring their obligation, or that they are on the verge of closing down their business (or filing bankruptcy). If this is the case you may need some help in the A/R process.
Remedies
Phone Calls
When an account is in default the first contact should be made quickly and done more as a friendly reminder than a collection call.
Try to get to the root of the problem. If it is a cash flow issue see above. If there is a dispute also see above. Document the call so you can refer to the conversation in subsequent calls.
If the account remains delinquent and you find yourself in a position to make another call, remind the client that you had a previous discussion and that you can no longer carry the balance on your books and place their account on a C.O.D. basis if you want to keep doing business with them. Suggest they apply for a loan and provide documentation that they in fact have applied.
Remember, you are in essence providing credit to the client and are entitled to protect your assets. If the client is uncooperative you have a serious problem on your hands.
Most clients will work with you in an effort to resolve the issue and retain the relationship with you. If you are not asking for something unreasonable they should not have a problem working with you.
Letters
An escalating letter series is a must when dealing with A/R.
When an account becomes delinquent you should send a "soft" collection letter to the client. The wording should such that the customer won't be offended and motivates him/her to address the issue.
Your goal at this point is to obviously have the customer bring their account current, but to also allow them to contact you in the event of a dispute or cash flow issue. You want to let them know that you value their business and are willing to assist them in resolving the issue.
If there is no response to the initial letter you may have a more serious problem and will need to escalate the tone of the next letter.
Credit Hold
In an attempt to mitigate your potential damages, you should place a credit hold on any client who is delinquent on their account. If an account is 30 days behind it may be a good time to send a notice that they will be put on credit hold in a specified number of days if payment is not made.
It is critical that you attempt to mitigate your damages in the event you have to take the client to court to seek relief.
Once the balance is cleared or an acceptable arrangement is made, you should set the client up on C.O.D. until you are comfortable with the relationship again.
Workout
In order to assist a client who is responsive but unable to clear the arrearage a workout may be in order. If you are willing to keep carrying the client you should negotiate a payment schedule that will clear the past due balance within a reasonable time frame.
In exchange for the workout you should secure the debt with a promissory note. You can also negotiate an interest rate as you are acting as a financing source.
Alternative Financing
If you would rather not carry the client's balance on your books anymore you can suggest he seek alternative financing in order to clear your account.
Explain that you are not a lending institution and that your business suffers when cash flow is restricted. If the client applies for a loan and is denied credit they will be given a written denial. Advise your client that you would be more apt to work with them once they have tried to pay you off via third party financing.
{quotes right} The squeaky wheel gets the grease.{/quotes}
Third Party Assistance
If you are unable to resolve your issue with the client internally you may want to refer the account to an attorney or collection agency for handling.
Most attorneys will require a retainer to get started and their main focus will be sending letters and going to court. A full-service collection agency on the other hand will make phone calls, skip trace and conduct asset investigations in addition to sending letters and providing litigation services.
Most collection agencies handle cases on a contingency-only basis, which means they only get paid if they recover money.
Both of these avenues provide "third party clout" which is very effective when dealing with a delinquent account. The key to using an attorney or agency is to know when to forward the account. A good rule of thumb is that when an account is 60 days behind or more and there is no longer communication between you and your debtor, it is a good time to consider these options.
Waiting too long can provide additional cover to the debtor in which they can hide assets or go bankrupt. Remember, "The squeaky wheel gets the grease."