How to develop payment collection process?

Principles and Methods of Collections

Fortunately, most customers pay their bills in the normal course of business. In fact, based on historical data compiled by the Foundation, delinquency generally averages between 7 and 9 days across all industries at any given time. Additionally, delinquency in excess of 91 days for all industries rarely surpasses 2 percent.

Good business requires that collection of invoices be made promptly and without any damage resulting to the customer relationship. It is this latter requirement, namely, to retain the customers' goodwill, which makes the collection problem a difficult one and which makes skill and tact essential in the handling of collections. Just how much pressure is to be brought to bear to obtain prompt collections and to what extent the relationship may be jeopardized in the effort are questions of policy. The collection problem should be analyzed and the collection policy defined in accordance with such objectives as:

• the policies of the selling division involved with the problem
• the economic climate in general
• the importance of the customer
• the effect of the combination of dollars and number of customers delinquent on the entire receivables portfolio.

Points to Consider Our attention is caught by the exceptions, those who do not exhibit the expected pattern of behavior. In evaluating a delinquent customer (or the portfolio of delinquent customers), several factors should be taken into consideration.

• amount owed--a company can afford to devote more time and effort to the collection of large balances than it can to smaller ones. Two pitfalls to be mindful of in this connection are:
  • the willingness to write-off small balances (which can add up over a year)
  • obstinate, imprudent collection efforts (holding on to the collection for too long).

Either situation can lead to an unprofitable operation, the former through direct credit losses and the latter through a more insidious rise in the costs of recovery. The time to terminate a collection effort is crucial. The decision can make or lose money. Possibly outsourcing of collections based on dollars of exposure should be considered to control collection costs.

• how long has the item been unpaid--consideration of the age of the item is important. The value of the receivable falls rapidly as a function of time, and the longer the debt has been owed, the less likely you are to be paid.
• pattern of payment--note whether there have been partial payments or any effort to settle the debt. Has the customer made any sincere effort attempt to take care of the obligation.
• customer relationship--how long have you been dealing with the customer? If the customer is new, you owe it to them and your company to make your policy on collections clear from the start. Neglecting delinquency at this time is inviting problems forever with the account. If it is an old customer, how has the payment pattern been? How have any delinquencies been cleaned-up in the past? Is there a problem with the product or service?
• previous dealings with the customer--how has the customer lived up to its commitments in the past. Has the account ever been closed and reopened?

Principles of Collection Certain principles have been found especially useful in the field of collection and may be grouped into the following areas:

• collect the money
• maintain a systematic follow-up
• get the customer to discuss the account
• and, preserve goodwill

Collect the money The primary job of the person responsible for collections is to collect the money as close to the terms of the obligation as possible. There should never be any doubt as to why the individual is engaged in this particular task. The debtor has an obligation to pay within the terms of the agreement. It is the job of the collection person to make sure that this obligation is met. The tone may be indulgent at first, but should be intensified and accelerated as much as necessary to ensure payment by a debtor.

Systematic follow-up After the initial contact with the delinquent customer, it is important to keep additional contacts on a strict schedule. If the collector, for example, is told that a check will be mailed in a few days, it should be noted. If the check is not received at the promised time, a follow-up is essential, otherwise the collection effort will become ineffective.

Systematic follow-up of accounts, even those which can not pay immediately, reinforces the serious nature of the outstanding debt and emphasizes the importance attached to it by the creditor. That in itself is an important collection advantage.

Discussing the account Once the collector gets the customer to talk about the delinquent account, the collector is well on the way to receiving payment. That is why emphasis is placed on inviting the debtor to talk. The object of the discussion is to get the debtor's explanation of the delinquency. It may be a question of a dispute; it may be due to a temporary shortage of funds; or the customer may intend to hold off payment so the creditor's money can be used in its own business.

During the discussion, the collector may begin to see the debtor's situation more clearly. If the slow payment is the result of a tempory cash flow problem, tolerence of slower payments may be accepted, but it should be emphasized to the customer that the new schedule of payments must be completed.

Preserve goodwill Even though the customer may be experiencing some difficulty in meeting payments, it does not preclude them from becoming a good customer in the future. Therefore, it is important to preserve goodwill while pressing for collection. This requires not only tact, but knowledge of the customer and industry. One of the advantages claimed by specialized collection personnel is that they can develop these techniques to their fullest. On the other hand, the team concept presents the opportunity for credit and customer service personnel to better understand the relationship of the customer to the industry and overall marketing objectives of the company.

Methods for Improving Collections Awareness is the first step in collections--awareness of what is happening in the economy, in your industry, in your own company, and with your customer. The same investigative and analytical techniques which are used for credit approval are valid for the collection process. Unless you have some idea of what your customer's problems may be and WHY they are paying you slowly (or not paying at all), you may not take the correct first crucial step in collection.

The collection process begins in your own department, and then with other departments in your company, such as shipping, billing, sales, and service. Before contacting the customer, make sure you clear up any internal problems such as:

• unapplied checks
• unresolved billing or merchandise disputes
• unused credits for returns or adjustments
• any verbal "special terms" given by sales reps

Let's deal with the questions most inexperienced collectors ask:

• When do I start collecting?
• Whom do I contact?
• How do I say or write it?
• How often do I follow-up?
• When should I consider litigation?

When do I start? Collection really starts with the customer invoice. Make sure your terms are clearly stated so the customer knows exactly when and how much to pay, and where to mail the check (or electronically transfer the funds).

Check to make sure your billings go out promptly, preferably the same day as shipment, and that you have abided by the customer's request concerning correct billing addresses, duplicate invoices, etc.

When you begin, depends on a number of things--your selling terms, the custom in your industry, your competitive position, and your company's own financial requirements. Some industries, due to their competitive nature are notorious for not following up for 30-45 days after the due date, thereby extending terms. If your company is dominant in your industry, you stand a better chance of having your customers adhere to your terms than if you are a small company, or new in the market, trying to expand its customer base.

As with a credit policy, collection practices must be flexible. If your company is in the midst of a large promotion requiring customer cooperation, you may want to alter your normal timing until after the promotion is over. Conversely, if your company is in a cash bind, and needs cash more than new sales, you would tighten up. Because collection is one of the least popular things your company does, make sure you keep management informed of what you are doing, and your success rate.

When to start should not be left up to individual collectors, but should be part of a formal credit and collection policy. If you have different product lines with different type customers, and different selling terms, your collection practices should be tailored to those differences.

You should develop some sort of matrix which outlines the timing and type of collection effort.

by always follow

and put strategy for collection and determine period