Before I became involved in the collection agency industry, I was a credit manager for many years, and I can tell you the things that I learned from building a healthy credit cycle. I saw A/R and sales working at cross-purposes, I saw negligent companies doing nothing to manage their receivables, and let thousands, if not millions, of dollars go to bad debt write-off.
After becoming a collection agency manager, I saw many occasions where our clients could have recovered their money, if they had only taken a few precautionary steps in the beginning, or recognized the warning signs and acted sooner. The more information a client provided to us, and the earlier in days sales outstanding (DSO) they transferred the file to us, the better our odds of recovering their funds.
Clients that issued scheduled final notices, kept their information current, and had an absolute deadline for payment from any type of client often resolved a good portion of their problem accounts before I had to become involved. And when I provided them some simple tools and resources, their credit cycle became healthier! And that’s what this article should help you with.
For the purposes of this article, I’m going to address the small-to-medium businesses out there, who don’t have a lot of time or manpower to police their receivables, although national organizations should take note of these basic precautions – many times, I have received incomplete debtor information on a file from even the largest creditors.
Get To Know Your Customer
Whether you gather this information when soliciting or receiving a sales lead, or after you have confirmation of the relationship, there are things you should gather right at the beginning that will help you service the customer, and prepare for a worst case scenario down the road.
So many companies are so happy to have the business from a client or customer, they fail to gather some basic information that is certainly within their rights to collect, and will make the relationship stronger along the way.
Obviously, someone buying a $20 product has less risk involved than someone agreeing to a $20,000 contract – gather as much information as is appropriate, and weigh it against the risk to your company.
For consumers or individual clientele:
• Get their personal information – name, date of birth, and social insurance number.
• Find out where they live – address, time there, rent or own, landlord or mortgage holder.
• Be able to reach them – residential and cellular telephone numbers and email addresses. Test them to make sure they actually work!
• If you can’t reach them, have a backup plan – spousal information, a list of personal or business references, or such. Again, test them! The information may not be accurate, and that’s the first warning sign.
• How are they going to pay you? Get employment information, including telephone numbers, income, and address. If your business model allows for it, get a voided cheque or credit card number and a signed agreement that you can run their debt against that account at a certain point.
• Leave the door open for more information – if the customer can sign an agreement to allow you to pull a credit bureau, share their personal information with an outside company, or such.
• Have a contract! Make sure the customer is signing an agreement that services have been rendered, and that they agree to pay any outstanding amount, plus any interest or charges that are reasonable.
For commercial or business clientele:
• What is the company legally known as? It may be Bob’s Trucking Co, but if it’s really 11983465 Ontario Ltd, note that.
• Is it a proprietorship, or a corporation? Who is ultimately responsible for the business client?
• If you have the name of the principals of the company, get their direct contact information, so if you need to discuss the account with them, you can easily reach them – telephone and cellular numbers, extensions, or email addresses are vital.
• How many years have they been in business? Are they stable?
• Get trade references! Call them and ask what sort of track record they have with them. Aim for other service providers – banks and financial institutions are less likely to share information. Stay away from sources that will give you a skewed image of the company – personal references, or information provided directly from the commercial client.
• Get corporate banking information! This will help you down the road.
• What guarantees do you have? Did someone sign a personal guarantee? Is there some sort of credit limit, or a surety bond through an insurance broker?
• Have a contract! Just like a personal customer, a commercial client needs to have someone sign a service agreement or contract that binds the company to paying for services rendered, plus any interest or charges that are reasonable.
Once you have all this information, written down and kept somewhere where you can access it, you can make a reasonable assessment on how safe your new customer is. And make sure your Accounts Receivable staff can access this information easily when contacting an outstanding account.
Don’t Get Surprised
So you’ve gathered all the information you need to deal with the customer – but how often do you update it? If you have been dealing with a company for 4-5 years, it’s possible they’ve changed banks, incorporated, sold shares, or moved. It is strongly recommended you set up a schedule to re-verify the customer’s information. It doesn’t have to be too frequent – once a year would be fine. You can set this up to be part of your customer support team’s efforts.
Keep records of communication with the client – it may give you information you need later.
Watch For Warning Signs
Often, when a customer has a proven track record with you, and things start slipping, whether it’s DSO on your accounts receivable, or reliability in keeping in communication with you, it’s often a sign of a greater problem that exists somewhere else.
To prevent catastrophe, make sure you have limitations built in and advertised to your client in advance. If their accounts receivable go over 90 days, they can’t receive further service, or their credit limit with your company is subject to reassessment each year.
And keep an eye on things! Pull an A/R report regularly, or keep a log of how many days after service is received that the customer pays, to build a track record to watch. Monitor the volume of their purchases or services rendered.
Be Firm and Consistent
So many times, I have seen clients let an account age far too long, because they had sympathy for the customer’s situation, had a long relationship with the customer where “this had never happened before”, or they accepted continuous promises that the matter would be resolved.
Have an A/R game plan and stick to it.
When the customer goes over your basic expectation for paying you, communicate with them – whether it’s a letter or a call, let them know (politely) that they are past due.
When the customer hits your limit, and you should always set a limit, whether it’s 90 days, 150 days, or whatever is reasonable for your clientele, put out a firm line in the sand to resolve things. This should be a registered letter, preferably signature required, giving an absolute deadline for payment in full. Professionally explain the regretful consequences for failure to pay. No matter what, stick to this deadline!
Do Something With Your Debt!
If a customer hasn’t paid you, you have lost twice – you have lost the income you should have received, and you have lost time, manpower, and product in the meantime. Do not let these matters go, no matter how much they are!
Either through a representative or directly from your company, you should arrange for collection activity, registration with the credit bureau, and potentially look at legal action.
And when you are at this point, all the information you gathered (and kept up to date) will be the best asset you have in recovering your debt.
Things Are Going Bad Over and Over
If you have little or no bad debt, you are doing something right! Keep it up! But if you are writing off more than 2% of your net income, you are suffering cash flow problems for your business while your receivables are over 60+ days, and your credit cycle isn’t healthy.
Make changes as you need to – charge overdue interest (and hold the customers to it), increase your past due notifications, have a regular schedule to stay in contact with your clientele that are going sideways, and if you have need of a lawyer, paralegal, or collection agency, measure their successes and results. If you are throwing good money after bad suing people and not acting on judgments, stop! If your collection agency is only collecting 5-10% of what you assign, could you do better? At least every year (or if needed, every quarter) analyze your end of credit cycle plan and make changes that you think will reduce your losses, or cost of recovering them.
Keep Informed
Reach out to business organizations, colleagues in your business, a service provider that can analyze your credit cycle, or a business partner you can rely on for solid advice and guidance, or use as a sounding board for questions you might have. There is no need to be making decisions without input from other professionals who understand your field.
Conclusion
If you have questions regarding preventative measures in the credit cycle, risk management, or you are currently experiencing credit cycle issues, feel free to contact myself at Kingston Data and Credit.
Our office can provide some guidance and tools such as sample commercial or consumer application forms, personal guarantee wording, interest calculation tools, and sample final demands. We are happy to provide information from our company, as well as direct you to other Risk Management experts in the credit field to assist you. Feel free to call or email us.
Blair Wettlaufer
Kingston Data and Credit
Cambridge, Ontario
226-444-5695
http://www.kingstondc.com/
bwettlaufer@kingstondc.com
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