Lesson 1, Topic 1
In Progress

3.2. Principles and Methods of Collections.

ryanrori January 20, 2021

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Fortunately, most customers pay their bills in the normal course of business. In fact, based on historical data compiled by the Foundation, delinquency generally averages between 7 and 9 days across all industries at any given time. Additionally, delinquency in excess of 91 days for all industries rarely surpasses 2 percent.

Good business requires that collection of invoices be made promptly and without any damage resulting to the customer relationship. It is this latter requirement, namely, to retain the customers’ goodwill, which makes the collection problem a difficult one and which makes skill and tact essential in the handling of collections. Just how much pressure is to be brought to bear to obtain prompt collections and to what extent the relationship may be jeopardized in the effort are questions of policy. The collection problem should be analyzed and the collection policy defined in accordance with such objectives as:

  • the policies of the selling division involved with the problem
  • the economic climate in general
  • the importance of the customer
  • the effect of the combination of dollars and number of customers delinquent on the entire receivables portfolio.

Points to Consider

Our attention is caught by the exceptions, those who do not exhibit the expected pattern of behavior. In evaluating a delinquent customer (or the portfolio of delinquent customers), several factors should be taken into consideration.

  • amount owed–a company can afford to devote more time and effort to the collection of large balances than it can to smaller ones. Two pitfalls to be mindful of in this connection are:
    • the willingness to write-off small balances (which can add up over a year)
    • obstinate, imprudent collection efforts (holding on to the collection for too long).

Either situation can lead to an unprofitable operation, the former through direct credit losses and the latter through a more insidious rise in the costs of recovery. The time to terminate a collection effort is crucial. The decision can make or lose money. Possibly outsourcing of collections based on dollars of exposure should be considered to control collection costs.

  • how long has the item been unpaid–consideration of the age of the item is important. The value of the receivable falls rapidly as a function of time, and the longer the debt has been owed, the less likely you are to be paid.
  • pattern of payment–note whether there have been partial payments or any effort to settle the debt. Has the customer made any sincere effort attempt to take care of the obligation.
  • customer relationship–how long have you been dealing with the customer? If the customer is new, you owe it to them and your company to make your policy on collections clear from the start. Neglecting delinquency at this time is inviting problems forever with the account. If it is an old customer, how has the payment pattern been? How have any delinquencies been cleaned-up in the past? Is there a problem with the product or service?
  • previous dealings with the customer–how has the customer lived up to its commitments in the past. Has the account ever been closed and reopened?