Panic Collections

A company I know is hiring a number of temporary employees to work collections in a last ditch effort to boost revenues by the year’s end. The seasoned long terms collectors are supposed to focus on the most serious past due columns. On the surface, it sounds like a reasonable strategy. Allow the best collectors to work the most stubborn accounts and let a team of inexperienced collectors convince the customers to pay earlier than they normally do.

Oops, I just gave away the flaw in the logic.

Unless collections are considerably sluggish, usually, at least fifty percent of the accounts receivable is typically “current” at the beginning of the month. Twenty percent may be ninety days or more past due. This leaves thirty percent of the accounts receivable somewhere between thirty and sixty days past due. It is a well know truism of credit and collections that the older the balance the more difficult or unlikely recovery is possible. The most past due balances are made up of accounts that will never be collected, accounts that may be partially collected through litigation, accounts turned over to a third party, accounts that are making installment payments and a few accounts that will pay in full, finally, after an aggressive collection effort. The percentages of these are a fraction of the entire twenty percent.

So, this company I know is directing its best collectors to go after a very small percentage of the accounts receivable. Even though the objective is to increase collections, which by definition is to collect more money than usual.

Most of the money in an accounts receivable is between current and sixty days past due and this company believes it is a good collection strategy to put inexperienced, entry level collectors to go after it and let its ace collectors chase after what could be less than five percent of the receivables.

Why do companies think they can increase their cash flow by trying to collect the least collectible portion of the receivable? It seems, all companies do it. When in doubt throw your all stars at the impossible. This is just another indication that senior management does not fully understand their accounts receivables. “Ach, we need money, let’s try to collect from the bankrupts, skips and defaults.” Rather, “let’s go after the most amount of money, in the current, thirty and sixty day columns.”

And what will inexperienced temps accomplish? Management probably thinks that all it takes to collect money is to call the customers and remind them that payment is now expected. So, have your B team make the calls. Apparently, collections are just a matter of a power of suggestion. Even though, given today’s economic realities, companies are more than ever trying to extend payables where ever possible. So, imagine the match up; experienced accounts payable clerks trained in all matters of payable extension verses a collection clerk who has never called for money before.

It would make more sense to differentiate between increasing collections and salvaging collections. Put your best collectors on the largest collection percentages, current and thirty – sixty day past due and have them negotiate more favorable payments and let the temps…well, let the temps document the very past due amount for the lawyers.

In a bind? Let CreditPowers put a collection strategy in place that will work for you. Your comments are appreciated. See our website at http://www.strategiccreditmanagementsolutions.com/