Savvy Business Owners Recognize the Importance of Being Proactive

The proof is in the data

In a recent article published by the CCAA titled “Collection Trends”, Emil Hartleb, CCAA Executive Director, was quoted as saying that the longer a creditor holds on to a delinquent account the probabilities of collection of that account are greatly reduced. A chart provided in the article shows that this percentage drops from 94.9% probability of collection when action is taken to collect at the point when the receivable becomes due to a meager 9.3% probability of collection if that same receivable is housed for two years with no collection action.

In stating what may seem obvious and logical to most, Mr. Hartleb points out that not only does inaction by the creditor have a serious impact on a company’s cash flow, there is a certain opportunity cost involved in this inaction.  Once the receivable has aged to a point where the probability of collection is severely diminished, the allocation of various management and staff resources toward recovery of bad debt takes away from time and resources that may be spent on other more productive and profitable ventures.

Often times, a decision to postpone taking action is based on a creditor’s relationship with a consumer as opposed to an analytical decision.  All too often, a creditor bases the decision whether to take collection action or not on their former relationship with the consumer, the cost associated with assignment to a collection agency or a vicarious sense of empathy for the customer based on their own current struggles in a difficult economy.  The common thread in these scenarios is that creditors assume optimistic outcomes while the facts, as displayed in the CCAA’s article, provide proof that payment is less likely the longer a creditor holds onto an account while taking no action to collect the debt.

Creditors facing these circumstances should push their emotional attachments to the debt and to the customer aside and implement preventative and/or proactive measures that increase the probabilities of recovery.  Implementing one or more of the following tips may assist creditors in salvaging potentially bad or severely delinquent debt, as well as help position themselves for fewer problems in the future:

• Implement a letter or email campaign to remind customers of payments due on the due dates of their invoices.  This can be a quick memo reminding the customer that the creditor values their business and that they have a current invoice that is due immediately.
• Utilize a third (or disinterested) party to evaluate circumstances of a past due account and determine the best course of action to take; especially when the account concerns a friend of the boss or a long term customer that is demonstrating the typical traits of a struggling company.
• Engage a third party (or collection agency) that has access to a database and/or credit rating system that can advise if a customer is demonstrating trends of delinquency or if they have been placed for collections recently.
• Develop a “soft touch” approach for early-stage delinquency where a creditor makes contact with the customer to determine whether or not there are indications of financial problems.

Savvy business owners know that being proactive in today’s economy will help preserve and protect their cash flow and profitability.  Since the environment of the collections world has evolved in recent years, successful agencies have had to employ more sophisticated approaches and introduce more services that provide business owners with an easy way to be proactive in their collection efforts.  A key component of today’s proactive business is to shop for a successful collection agency that has the ability to tailor a collections process that will assist a creditor in making difficult decisions, as well as provide a creditor with a number of services that allows them to salvage relationships with customers that may be facing difficult economic situations.