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Cash Flow and Collections
By Michael C. Dennis, MBA, CBF

Business Collection Tips
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If cash flow is the engine that drives businesses forward, delinquent accounts are the brakes that bring businesses to a sudden and screeching halt. Most credit managers are aware of the fact that the probability of collecting a delinquent account drops dramatically over time. For example, according to one analysis after six months the probability of collecting drops to 57%, and after a year, the chance of collecting a past due account drops to well below 30%. Credit managers need to make certain that their internal collection efforts are adequate to the task.

Here are 15 ideas that credit managers can use to control delinquencies and collect more effectively starting today:

  1. Make sure your customers know your terms of sale. Make sure these terms appear on every document that is sent to customers including invoices, monthly statements, collection letters, and dunning notices.

  2. Flag accounts with irregular payments for closer scrutiny.

  3. Eliminate so called grace periods. Follow up immediately on past due balances.

  4. Establish a method of monitoring the financial performance and payment patterns of accounts identified as marginal credit risks based either [a] on their financial condition or [b] on their payment history.

  5. If DSO is creeping up, review and tighten both your collection procedures and your credit granting policies and procedures.

  6. Actively discourage extended payment plans. Make certain that any such arrangement is approved in advance by you. Be certain that your subordinates and the sales department understand that they have NO authority to offer or accept extended payment plans without your approval.

  7. If you accept a payment plan, make certain it is documented - preferably in the form of an interest bearing Promissory Note with a default acceleration clause, and accompanied by a personal guarantee

  8. Treat customers payment proposals as invitations to negotiate rather than deals cast in stone.

  9. If a customer cannot pay you in full, request and expect them to make a substantial "good faith" payment, and to make a specific commitment to pay the remaining balance within a reasonable time frame.

  10. Be prepared to hold orders sooner rather than later when accounts go past due.

  11. Talk to decision makers, not message takers.

  12. If a customer is withholding a payment over a small dollar dispute, insist that the undisputed portion be paid immediately.

  13. Recognize that at some point, accounts cease to be customers and become debtors. When an account becomes a debtor, it is more important to collect the past due balance than it is to worry about damaging goodwill between your company and the account.

  14. Many collection problems [and bad debts] result from poor or inadequate initial credit investigations. Think of credit extension as making a loan. A bank would not make a loan without a completed application. A trade creditor should not extend credit without receiving a credit application and then carefully evaluating the applicant's creditworthiness.

  15. Consider seeking the help of a third party collection agency if and when you find that you are no longer making progress in collecting on a past due balance. In debt collection, if you are not moving forward, you are moving backward --- there is no neutral or middle ground.

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