SYSTEMATIZING THE

DEBT COLLECTION PROCESS

NIGEL A.L. BROOKS

THE BUSINESS LEADERSHIP DEVELOPMENT CORPORATION

Article reprint
 SYSTEMATIZING THE DEBT COLLECTION PROCESS

In tough economic times, it is reasonable to expect that those enterprises

that extend credit to customers, whether individuals or other enterprises,
may have a tough time collecting the money owed. Therefore, it is
necessary to have a systematic debt collection process in place, for both
good times and bad, that anticipates that some accounts will go past due,
and is deliberate about collecting them when they do.

Extending credit is a standard practice in many industries. Although

accepting credit and debit cards as means of payment for retail
transactions is common, many enterprises extend credit in industries
where trade debt is normal practice.

For example, manufacturers, distributors, and wholesalers extend credit

that enables their customers time to generate cash flows from sales to pay
for the products sold. Payment terms may vary from ten to thirty days, and
discounts may be offered as an incentive for prompt payment. For
example, "2% 10 net 30" means that a customer can take a two percent
discount if they pay a supplier within ten days, or pay the entire amount in
full within thirty days.

When sales slow down, working capital gets tied up in inventory, and the
payables of customers start to age. Hence "net thirty" can become "net
forty five" or more very quickly. Although suppliers may require personal
guarantees from lifestyle business enterprise owners, enforcement can be
tough.

Even those enterprises that accept credit and debt cards may have to
extend credit from time to time, especially if they are providing
emergency services. For example, dental practices and automotive repair
shops are prone to extending credit to customers in dire situations even
though they may accept cards. Such situations include toothaches, or
broken down cars used for work. It is hard to refuse a customer who is in
pain or is immobile, even if they cannot pay right away.

It is important for an enterprise to keep on top of its accounts receivable in

both good times and in bad, and to use early problem prevention practices
through a systematized approach to debt collection. The more debt ages,
the harder it is to collect, especially if collection efforts are started late.

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Handling past due accounts can be an emotional time for both creditors
and debtors, and can get out of control. Therefore practices should be
developed and enforced rationally to avoid embarrassments.

Characteristics of a debt collection system include:

● Knowing the law - in the United States, the Federal Fair Debt
Collection Practices Act and the Fair Credit Reporting Act extend
certain rights to consumers and requirements of third-party debt
collectors and credit bureaus. Many states have similar laws and
regulations. In house collection activities may be subject to such laws
also.

● Ensuring that policies, processes, and performance reporting

practices are in place for accounts receivable. These practices include
ensuring that all customers have credit limits and understand exactly
what credit terms are being extended to them; aging the receivables
portfolio, and beginning collection efforts as soon as accounts
become past due. It is important to know the ratios of amounts past
due to total owed by period, and the historical delinquency rates, so
that trends can be monitored, and corrective action taken quickly.

● Having an effective process in place for contacting customers

promptly and frequently whose accounts are delinquent, and ensuring
that it is enforced. Employees generally do not like to contact past
due customers and ask for money, and therefore accounts may fall
further past due. Hence, it is important to monitor the frequency and
recency of contact and the results. Procrastination does not get debts
paid.

● Using written communications with language that is compliant with

laws. Letters may start out diplomatically and assume that the
delinquency is an oversight. Subsequent letters may use stronger
language that suggests that further action may be necessary. Letters
must not contain threatening language, and must not say or imply
anything that cannot or won't be done, such as the use of collection
agencies or legal action.

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● Knowing when to escalate - policies should state exactly when third-
parties, such as attorneys and collection agencies are to be used,
especially as their intervention can motivate debtors to pay. Such
parties should be preselected, so that the turnover process is straight
forward. The terms and conditions of using such parties should be
clearly understood in advance, including costs, success rates, and
impact on future customer relationships.

When the debt collection process is systematized, customer relationships

can be managed and preserved because everything is conducted in
accordance with policy.

Effective accounts receivable management is an enterpriship

(entrepreneurship, leadership, and management) competency.

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For more information...

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About Nigel A.L Brooks...

Nigel A.L Brooks is a management consultant to entrepreneurs, business

enterprise owners, executives, and managers, and the enterprises they
serve. He specializes in developing the entrepreneurial, leadership, and
managerial competencies that build sustainable advantage from vision to
value. He is an author and a frequent speaker.

He obtained his professional experience as a partner at Andersen

Consulting (now Accenture, Ltd.), as a vice president at Booz Allen
Hamilton, Inc. (now Booz and Company), as a senior vice president at the
American Express Company, as president of Javazona Cafes, Inc., and as
president of The Business Leadership Development Corporation. He has
been a contributing editor for the Bank Administration Institute magazine,
and has served on boards of entrepreneurial networks. He was educated at
the University of Exeter, Devon, United Kingdom.

His clients are in the financial services, food services, high-tech,

manufacturing and distribution, pharmaceuticals, oil and gas, professional
services, retail and wholesale, transportation, and government industries.

He has experience in North and Latin America, Europe and Asia-Pacific.

www.nigelalbrooks.com

About The Business Leadership Development Corporation (BLD)...

The Business Leadership Development Corporation is a professional

services firm that works with entrepreneurs, lifestyle business enterprise
owners, executives, and managers, and the enterprises they serve.

BLD develops entrepreneurial, leadership, and managerial competencies

that achieve performance excellence by building sustainable advantage
from vision to value through:

 Strategic Management Consulting

 Executive Coaching and Mentoring
 Professional Training via The Center For Business Leadership
Development (CBLD)
 Motivational Speaking

www.bldsolutions.com

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