Improving your Collections

Thursday, August 15th, 2013

One of the areas that require extra attention during the tough economic conditions – as we’re experiencing now – is the collection of outstanding debts.

It’s an aspect of business that no one really enjoys – and even the people employed to do the job, very often, find it hard to do.  It’s a bit like being a dentist and drawing teeth.  You’ve got to do the job but your clients (patients) really don’t enjoy the process!  And, I’ve heard that dentists are the profession with the highest suicide rate (not sure if that’s true) – mainly because they feel so rejected, I guess!

Most firms I’ve been in have some form of collection process in line with their stated terms and conditions of credit.  The process usually goes something like this: at the end of the credit term – a phone call; two week later – another phone call (a little more terse!); and two weeks after that – a warning that the matter will be referred to collection agents.  This is followed by a personal letter of demand, then – if the debt is still not paid, a letter of demand from the collecting agent (usually an attorney); summons, judgment – and then, after all that, there is still no guarantee that the debt will ever be paid anyway.  I have felt that its usually not worth throwing additional collecting and legal costs after a debt, unless it’s material and there is a chance it can be collected.

Tough economic conditions mean that credit becomes harder to get.  Primary credit granters like the banks, in the form of a bank overdraft, get stricter on their limits and inevitably, firms that are struggling with cash flow, tend to make their suppliers wait longer for payment – to cover their cash shortfalls.  After all, it’s interest free and generally unsecured too – even though it’s actually cheeky!  But, this can just be a sign that the offending customer is actually on a slippery downward slope, and so firmer, stronger and quicker action is required.

Traditional collecting processes, once the debt reaches the ‘handing over’ phase, simply don’t work that well anymore.  People today simply don’t care – as long as it buys them some time!  And quite often, a customer will simply open accounts with a number of similar suppliers, and then ‘roll’ his purchases from one to the other – a bit like using one credit card to settle the balance on the other!

So, I think we need a new way of looking at the problem!

Clearly, there are those genuine cases where a late payment is the exception rather than the norm, and there might be a valid reason for it.  I advise clients to try and assist wherever possible, but be alert at the same time.  In all other cases, we must remember the old adage “the squeaky wheel gets the oil”.  Simply, your collection process needs to get the attention of the customer much more emphatically than the other suppliers on his list, and so that your payment is on top of the pile come month end.

We have discovered a firm that proposes to address this problem in a different way.  It’s name is ‘Accountability’!  They are a web-based service that partners with extensive Credit Bureaus, providing access to an active credit database of 22 million consumers and 1.7 million businesses. (check them out at https://www.accountability.co.za/)

Their service seems to be in two parts.   A regular monthly subscription to their service (R228) enables a member firm to

  • Access that huge database, to ensure better credit referencing – before granting credit.  Preventative credit policing!
  • To send out letters of demand to customers, via the web service, thereby creating a record of default on a customer within the database.  This will create a problem for the customer should he/she wish to obtain credit from other credit granters.  A ‘black-balling’ service, in effect!

Under the New Credit Act, credit granters have to be very careful extending credit to customers, and so having a poor payment record will definitely inhibit a customer’s chances of success in future.

A word of warning though!  Make sure your client/customer really is in default before going through this process.  Nowadays, having a poor credit record is not only a major constraint to doing business, it’s a major job trying to rectify too.  You don’t want an innocent customer suing the pants off you, if you make a mistake!

We’ve decided to introduce this process into our own business; to see how it works before we really recommend it.  I have a sense though, that we might be on to something worthwhile!