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Collection Agency Advice?

One of my clients is looking for a reference for a collection agency.  I also am wondering at what level it makes sense to use a collection agent given the amount they retain and the haircut you take on the settlement

Answers

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

What do they believe a Collection Agency will do for them, that they can't do for themselves?

If they have that many bad receivables (quantity, not dollar volume) then they have other problems (credit analysis, etc.) that need to be fixed otherwise they might as well sell their products at a 30% discount (what an average Collection Agency takes).

Jim Schwartz
Title: Corporate financial advisor
Company: Wabash Financial Strategies
(Corporate financial advisor, Wabash Financial Strategies) |

I agree with Wayne. The best help you can provide is to ask questions that illuminate the real issues and concerns before giving advice.

Still, hiring a collection agency may be an effective short-term solution. Time is of the essence and a collection agency may be able to move quickly. Doing analysis, strategy and implementation to address the deeper problems to which Wayne alludes is going to take time. The currently delinquent AR won't wait for that resolution.

The current approach/people aren't adequate. Were these orders from accounts that should never have been credit approved? Is there even a credit "approval" process?

Do the math to compare costs of the various alternatives at this stage. Would hiring a temp or permanent collector help? Each approach also has costs, even though they may not be as visible as the collection agency's 30% fee. Is there a particularly effective collector on staff who could take on some higher delinquency accounts? Are some current collectors weak performers who should be eliminated? Is there an internal resource who could be assigned a 6-9 month project to monitor and report collection performance for, let's say, accounts over 60 days, hold monthly or bi-monthly meetings with collection management where specific action plans and status for each delinquent obligor are reported, discussed, tracked and managed?

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

Jim -

I came back into a company as the interim Controller after doing other projects for the parent company (we''re talking about 20 years ago). When I left, a/r collection period was about 40 days on net 30. Respectable.

When I returned, it was 80 days. I immediately hired two Temps (kids) and with specific instructions (and pre-mediated clumsiness). I, along with these two temps were able to reduce outstanding and bring the period down to 37 days.

That's where it stayed for my tenure +/- 3 days. During the collection activity we only angered one client who left (we did collect our money), and when the Marketing/Sales Manager came in to scream, I told him they were number 24 on our list and had done so little business that I didn't want to hear about it (he was part of the collection problem).

The Temps cost maybe 2% of the total collected (that would have gone to collections) vs the 30%. Whatever the outstanding, do the numbers - it was cost effective.

Topic Expert
Regis Quirin
Title: Director of Finance
Company: Gibney Anthony & Flaherty LLP
LinkedIn Profile
(Director of Finance, Gibney Anthony & Flaherty LLP) |

There is no rule on when to bring in a Collection Agency. You really just need to be ready to accept the consequences. In my experience, collection agencies are necessary because the company is uncomfortable with asking customers for their pay and they have dug themselves into an Accounts Receivable hole. But just realize that when you call in a Collector, you are throwing relationship development out of the window. (I am clearly not a fan.)

I am always shocked to find companies still providing service to customers that are 120 days+ late in paying them. The feeling of course is. "If I threaten to stop service pending payment, I will loose the customer."

Just understand, a collection agency is a temporary measure because your process is broken. If you bring in this specialist, engage them for a set period (let;'s say six months) and fix the process. But this service should never be a constant service utilized. It is only a band-aid.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

Regis -

I've heard the argument from clients time and time again - we don't want to loose the client and they pay us eventually. Meanwhile they paying 4 or 5x the stated terms.

My question to the client is do they charge them more the item or charge them interest and then collect the interest? My second question is, do you play the same games with your suppliers?

The answer is always the same "No" to all questions..

Sometimes it is more cost effective NOT to do business...

Sara Voight
Title: Controller
Company: Critical Signal Technologies, Inc
(Controller, Critical Signal Technologies, Inc) |

One of my more effective methods of improving the credit process and collections, was tying the payment of commissions to collections within 90 days. All of a sudden our sales people were paying attention to the credit worthiness and re-focused their attention on accounts that brought in real revenue (not just volume of invoices) and paid within their terms. They now cared if the client they were promising the world to, was worth their time, especially if there was a likelihood they would not receive compensation on the deal. I, personally, feel that if your collections are out of control there is an internal issue that needs to be dealt with. If ignored, you will spend your career in this collection nightmare.

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