Any company, large or small, that extends credit usually has some amount of receivables
owed from slow paying or non-paying customers. The fact that not all customers
pay, or pay on time, is reflected in balance sheets under the description bad
debt or other receivables. Aging receivables can be managed
internally or by outsourcing to commercial collection agencies. Here are five
benefits businesses realize by opting to outsource to collection agencies:
Collect Sooner Rather than Not at All
The accounts receivables staff is often tasked with collecting aging receivables.
These people usually have other responsibilities and may naturally put off
doing collection work simply because it is not anyones favorite task.
Since the longer a debt remains unpaid, the less likely it is ever to be
collected, delay in collecting can be costly. Commercial collection
agencies understand this principal and are motivated by their business models to collect
sooner rather than later, recovering money that otherwise might be gone forever.
In some companies, salespeople do not receive their full commissions until
all monies are received from clients, thus forcing salespeople to spend at
least some of their time working in an accounting function. Not only can
this lead to confusion and deterioration of relations with clients, but the
unfortunate outcome of this practice is that every minute spent collecting
is a minute spent not generating future revenue.
Keep the Door Open for Additional Business from Existing Customers
Retaining existing customers is generally much less expensive than acquiring
new ones. By hiring collection
agencies, companies distance themselves from
the role of bad cop when existing clients are reluctant to pay. The first
notice from a collection agency may be enough to spur the customer into action
while allowing the relationship between the parties to remain cordial or
Work with, not against, Prevailing Business Practices
One way companies manage cash flow is by holding payables as long as possible.
Every company has a philosophy, if not an actual written policy, about when
to pay their bills. Sometimes the philosophy dictates that bills are not
paid until creditors demand payment in terms stronger than a monthly invoice.
A letter or a call from a collection
agency is often the trigger for a check
to be released.
Save Money by Paying Only for Results
When receivables are significant, there may be a dedicated collections person
who is paid a salary regardless of how much bad debt is recovered. Many commercial
collection agencies are paid only when they collect, so companies using collection
agencies can often save the expense of salaried employees.
Since banks review balance sheets when deciding to make loans or extend lines
of credit, it is important to have as small an amount of old receivables as
possible, while at the same time extending credit to new and existing customers
to fuel growth. By implementing a policy of collecting early and regularly
through neutral third party collection
agencies, companies keep their customer
relationships and their books healthy while improving their credit worthiness.
Finance for Non-Financial Managers
The Fair Debt Collection Practices Act (2006)