Collections Done Right

What’s the best way to collect money due your business? The answer is surprisingly simple: ask for it.

One caveat, though: sending out yet another past due notice doesn’t count. Collections-by-mail is an exercise in futility. What you need is direct contact. Pick up the phone and call someone. Most customers will talk to you. If the individual refuses kick it upstairs.

When on the phone, there are three things to remember: commitment, commitment, commitment. Whatever it is – an assurance to pay, a promise to investigate, an agreement to seek authorization – be sure to get some type of commitment. Also be sure to set a clear time to call back for follow up.

If you’re overburdened with collections responsibilities, remember the Pareto principle – namely that roughly 80% of the effects come from 20% of the causes. Applied to collections, this means that approximately 20% of your past due accounts are responsible for 80% of your past due money. Sort your past due accounts from highest to lowest in terms of dollar amount and this will become self-evident. Then, start making your calls top-downward. Keep a record of the commitments and times for your follow-up – and do a new 80/20 analysis every week.

It’s a business truism that what gets measured gets done – and this is as true for collections as for any other aspect of your business. To measure your collections performance, start by calculating your accounts receivable days and use this metric as your benchmark. We’ve seen dramatic results – such as receivable days cut in half in just a matter of months.

It’s also important to keep your collector incentivized. Paying a monthly bonus based on each day of reduction works particularly well. If your monthly sales are $500k then each day would be worth roughly $17k. A $50 bonus for each day reduction is a good deal for everyone. When your receivables are under control, adjust the bonus based on a new target so that you can maintain control and still provide the incentive.

Remember, the squeaky wheel gets the oil. Your customers may have limited resources – but they’ll pay you before they pay a silent vendor.

If you need help setting up a collections program let us know. The CFO Connection will be happy to help.

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