by Grant Wickes

Most customers pay when they receive the first or second monthly statement. In fact, statistics show that over 90% of bills are paid before reaching 60 days. Accounts reaching the point where they have violated the business’s terms by two fold (30 day net is still outstanding at 60 days) have actually done the business a favor by neatly sorting themselves out as those with cash flow problems. They are trying to say something, namely that they are over extended and do not see the business as a bill that must be paid, but as a source of a short term loan. Businesses that are billing customers a third time, should be taking a serious look at this account. This is where proactive action can make the most dramatic effect on a business’s cash flow and ultimate net profits and it actually improves customer relations while reducing internal frustrations and costs.

Well run account receivable (A/R) departments contact accounts early and consistently to:

Either be paid in full, or have received a payment on a pre-arranged payment plan, before the account ages past 90 days
Know for sure that all accounts aging past 90 days will require additional persuasion (attorney/collection agency).

These rock bottom A/R results are achieved by top businesses everywhere simply by utilizing a service that consistently contacts their delinquent accounts for them, giving debtors the impression of a consequence if the account is not paid, motivating them to contact the business directly. The best part is that this service cost less than most businesses currently spend trying to contact delinquent themselves using n-house collectors.

The majority of businesses try to collect on slow paying/delinquent accounts in-house by hiring collectors because most collection agencies are too expensive (charge a percentage) and damage customer relationships.

Trying to collect on slow paying/delinquent accounts in-house is not cost effective. If businesses calculated how much does it cost to follow-up on slow paying accounts in-house they would very surprised.  Studies reveal that about 80% of the average business AR budget goes toward getting those delinquent accounts to pay. If you have a business I challenge you to do the math! Calculate the time it takes to track an account, send out invoices and letters, as well as make calls. When you include the cost of office space, hourly wages, vacation, workers comp, and insurance it is very expensive. According to the Dartnell Institute, the average cost of working an account internally over a six month period is .60 per account.  Businesses could use their money more wisely by paying employees to be productive instead of chasing after delinquent accounts.

Problems every in-house collector encounters.

Not being able to contact the debtor. Even the best collection letter and/or the best collection caller can not collect a dime if they can not contact the debtor!  The problem actually develops as a result of technology. In this day and age; it is easy to identify where the various forms of communication (letter, phone call, email…) originate. As a result, since most people choose not to be contacted by someone they don’t know, much less someone trying to collect money, they avoid being contacted. Businesses rarely track this, but, if they did they would find out that when their collector tries to contact a debtor they very rarely get through. They are actually paying their collector to do the same thing over and over again not even expecting different results.
Not getting any response because people pay bills based on consequences—if there is no consequence there is no response.  In this current economy many people, as well as businesses, do not have enough money to pay all their bills so they sort by what bills must be paid and what bills can be put off. The bills for the essential necessities like the water, electricity, phones, … get paid first to avoid the obvious consequence of no longer have access to them.  The next bills to be paid are the loans and lines of credit to avoid the consequence of having the money supply cut off. When the in-house business collector sends out their invoice, it is from a business transaction that happened over 30 days ago, that has no real consequence associated with it when not paid, so it ends up in the pile of bills that can be put off.  Unfortunately, the bills that can be put off fall behind the living and entertainment budget on the priority list!  If the debtor has any money left over after the going out and having fun (considered a necessity), that money is used to pay the bills, or at least some to the bills, in the “no real consequence” pile.
In-house collectors get discouraged and lose motivation. You have a collector that is trying to contact debtors in order to collect money (a job nobody likes) and the collector is not getting through to anyone. We are a result oriented society and doing something that consistently gets very little results hurts self esteem and creates frustration.  How motivated do you think they are to do the job of trying to contact debtors?  In most cases, collecting money is not the only responsibility in-house collectors have so it is done inconsistently–the job they do after everything else gets done if it gets done at all.
The in-house collector gets frustrated and can easily say the wrong thing damaging customer relations or resulting in a law suit. Doing a job that nobody likes and constantly getting criticized because they are not getting results is frustrating.  The collector’s frustration comes through to the debtor and can easily lead to taking their words the wrong way. Debtors do not like people calling about money anyway so there is a high probability of taking what the collector says wrong and responding aggressively. This aggression on both sides could easily escalate until the collector ends up saying the wrong thing–a situation that usually ends in loosing the customer and not getting paid at all, or worse yet, getting sued for harassment.

Normal Collection Agencies do a poor job of collecting money and charge too much for the money they do collect.

There are about 4,000 firms out there that collect delinquent business debt so picking the right one for your business can be difficult. Here are some basic statistics–the average collection agency:

Collects 14% of the accounts submitted for collection—that’s an 86% failure rate! Does it really matter what they charge if they don’t collect anything?
Charges 33% of the money they collect– making it impossible to maintain a profit even when they do collect.

Normal collection agencies get poor results because they are used as a last resort to go after bad accounts. Obviously going after bad accounts is very difficult so the success rate is very low and the cost is very high.

The good news it that the debt collection industry is going through a transition away from the traditional contingency model and toward a more progressive approach called “profit recovery”.  As of the writing of this paper there is only one collection agency using this new technique, but, it is so much better than anything else out there others are sure to follow. 

I have been a business consultant for many years and have always made it a habit to ask;

“If you could have your perfect dream collection agency and you could have anything you wanted–what would you like to see?” 

The person responsible for the business’s bottom line (usually the owner) consistently tells me that, if they could have their dream collection agency, they would want the following:

A collection agency that gets results.  Accounts go to collections are never seen again—an agency that willcollect the money!
A collection agency that does not cost so much (no-percentage)–the business looses money even when the collection agency collects!
A collection agency that makes it easy to know what they have done—good reporting!
A collection agency that makes it easy to submit debtors without all the paper work.

There is a “Profit Recovery” service that gives businesses owners everything they tell me they want in a collection agency–it is their perfect collection agency!  The “Profit Recovery” system is conceived to be the new answer to the very old question; “how do I get my delinquent accounts to pay me?”

Historically, collection agents have charged a contingency commission of anywhere between 25 and 50% depending on many variables including the amount of the debt, the age of the account and whether it was a commercial or retail debt. The upside to this approach was that the client would only pay the collector if the account were successfully recovered. The downside had always been that the high commission fees kept clients from placing accounts for collection until they were virtually uncollectable.

Critics of the collection industry have always been quick to point out that most businesses have profit margins of between 5 and 20%. In almost all cases traditional collection agencies charge commissions in excess of this typical businesses profit margin. Paying 33% to collect an amount where your margin for profit is 10% does not make much sense. At best, a business is simply cutting their losses.

The Profit Recovery solution is based on charging a fixed fee per account placed for collection (TSI’s is typically around .00 and fluctuates based on account volume).  By paying a fixed fee, rather than a sizable percentage of the whole amount, Profit Recovery clients are experiencing some real advantages. They are:

The fixed fee encourages businesses to place accounts earlier, when they are far more collectable.
Paying a fixed fee allows a client to maintain a profit on collected accounts, so that businesses can utilize a collection agency and still complete a profitable transaction.
In the case of TSI, a “diplomatic” approach is offered for clients who do want to get the agency involved early in the process. Many of TSI’s 60,000-plus clients place accounts as early as 45-90 days delinquent.
Because of fixed fee nature of the Profit Recovery concept, debtors are encouraged to pay the clients (creditors) directly. This is possible because the agency is not claiming their 25-50% contingency fee.

All things considered, the Profit Recovery concept is a giant step forward for a very conservative industry. If you have delinquent or slow paying accounts in your business it would certainly make sense to look into this new and progressive way of managing debt.

The vast majority of money paid to collection agencies is directly related to contacting debtors by mail?  The “Profit Recovery” service puts the power of a collection agency in the hands of a business without charging them a percentage—average cost is per account (much less than the business was spending trying to do the same thing in-house). When your debtors receive a letter from them (a collection agency) even though it is a very diplomatic “Courtesy Notice” it becomes a priority.  The debtor is directed to either send the payment directly to the business or contact the business to make payment arrangements—exactly what businesses want!  The business looks like the good guy saving the debtor from the collection agency and gets paid at the same time. It is much easier to receive a call from a motivated debtor than to try to contact a debtor that really does not want to talk much less pay.

The U.S. Department of Commerce studied the collectability of accounts held in house and the following chart documents the results they have found. It shows that there is a 95% chance of collecting within the first 30 days. After that the collectability drops to less than 75% by day 90 and then quickly falls off by ½% a day after that to 30% by 6 months. 

The collectability of delinquent accounts drops off rapidly as they age so it is critical to contact debtors early in a way that will motivate them to pay. The “Profit Recovery” service motivates delinquent accounts to pay, without harming valuable customer relationships, cost less than businesses spend trying to handle A/R in-house so businesses are able to use their service early (usually between 45 and 90 days) when accounts are collectable. Looking at the chart is it easy to see why the “Profit Recovery” system’s recovery rate is over 50%.

Trying to get slow paying/delinquent accounts to pay using in-house collectors is expensive and non-productive. The “Profit Recovery” service has been utilized by business for over 40 years, is used by more than 70,000 businesses nationwide including many of the fortune 500 companies, and collected more than 0 Million Dollars last year alone. All things considered, the Profit Recovery concept is a giant step forward for a very conservative industry. If you have delinquent or slow paying accounts in your business it would certainly make sense to look into this new and progressive way of managing debt.

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