Your collection or credit department doesn't operate in a vacuum, and your bad debts are not an isolated part of your business. If you blame your credit and collection department for all of your past due accounts, you aren't looking at the entire picture. Everyone in your organization must understand how their roles affect the collection of accounts receivable and act accordingly.

WHO CAN WE BLAME? Anne attended one of our seminars on collections. She was the collection manager of a small but growing company whose bad debts were out of control, and the owner was applying a lot of pressure to eliminate delinquencies and reduce days outstanding.

Anne absorbed everything. Never in all the years that we've been putting on seminars have we had a participant who seemed more motivated to learn. So we were totally surprised at the end of the session when she came up and said that we hadn't been much help. We asked her to stay afterward so we could review her specific problem.

We surveyed different areas of the business and determined that Anne was not the problem. She was assertive, conscientious, organized, enthusiastic, and determined to collect her money.

So we moved on to the next area and hit the jackpot. Anne said that the owner was aggressively trying to grow the business. In his desire for growth, the owner, unfortunately, had gotten directly involved in the credit-approval process and had relaxed the usual strict criteria. To make matters worse, when she tried to control the customers' purchases, he often overruled her.

We suggested that she try to keep the owner out of the credit decisions. The company needed a written credit policy. This policy should spell out who is responsible for writing up the credit application and how it is to be verified. The policy should state who is responsible for explaining the credit terms to the customer in advance of delivery, how the credit limit is set, and who can approve credit.

Anne told us that the salespeople were responsible, but they were more interested in earning commissions than in writing a quality credit application. They were also responsible for explaining the payment arrangements to the customer. She felt that they were afraid to discuss the terms in detail for fear of losing the sale and that the owner would not be willing to make any changes.

Next, we looked at billing practices. What happened when a customer missed a payment? Anne told us she waited until the account was thirty days past due before she sent mail, and then she sent a statement every thirty days thereafter. At ninety days, the owner was supposed to review each delinquent account, but was usually so far behind that he didn't follow through on a timely basis.

We suggested she speed up the collection process and include some telephone calls with the letters. We also recommended she request authority to charge off the account or turn it over to an outside service for collection when the owner wasn't available. However, as we expected, she told us the owner was not open to change.

MANAGEMENT REPORTS. Sometimes you don't realize you have a delinquency problem because of inadequate management reports. But if your delinquencies are bad, preparing reports seems like an impossible task. We asked Anne about her management reports or other collection tools. She said that she got a printout of all accounts that were thirty, sixty, and ninety or more days past due. Because she had to deal with so many accounts, we suggested the company develop some month-end exception reports. The computer could select:

• All the customers whose accounts had undergone a statistically significant unfavorable change.
• Those customers who were chronically behind and needed constant attention.
• The new customers who had already missed their first payment. Then she could train the new customers to pay on time before developing bad habits.

We suggested printing reports with the larger balances first. An exception report would also allow her to concentrate on the appropriate accounts and not waste time trying to review every single past due account. Anne told us that she had asked the owner for some new reports, and had been told that their computer operated with off-the-shelf software, and no changes could be made. He certainly wasn't going to spend money to have the programs rewritten.

PAYMENT ARRANGEMENTS. We asked Anne who was responsible for giving customers permission to reduce their payments. She said she did. We were glad that she was monitoring the extension of terms closely because giving customers permission to reduce their payments is just another way of cutting prices. It also reduces cash flow and makes you more likely to accumulate bad debts.

We asked whether the company had built in any payment incentives or penalties such as cash discounts, discounts for prompt payment, interest, or late charges. She said it was not a common practice in their industry to charge interest or late charges and had been told the company's margins were not large enough to absorb any type of reduction in prices.

We asked her about the quality of her company's product and whether her company handled complaints promptly. She said that this area was not a problem. The reason we mentioned this was to eliminate the excuse of a disputed account as a stalling tactic by the customer.

Anne could sit at our seminar for five days, and her recoveries would not improve significantly. She had very little control over things that could make a difference. She needed to convince the owner to make some changes.

BLAME MANAGEMENT. Collection departments alone don't cause bad debts -- bad management causes bad debts.

David and Martin Sher own and operate AmSher Receivables Management, based in Birmingham, Ala. David is president of the International Association of Commercial Collectors, and Martin is past president of his state unit of the American Collectors Assn. He is also a certified collector and certified instructor for the ACA. This book was inspired by the Sher brothers' seminar, Championship Collections.

Reprinted and excerpted with permission from How to Collect Debts (And Still Keep Your Customers)
By David Sher and Martin Sher
Copyright 1999, David Sher and Martin Sher
All rights reserved
Reprinted with permission of Amacom, a division of the American Management Association International, New York, N.Y.
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