Business Brain: Size matters when it comes to your credit and collections
The size of your company and its resources will help determine your approach to extending credit and collecting accounts. The scenarios that follow illustrate two different approaches to credit and collections.
David operates Roadhopper, a local delivery or "courier" service. David employs two other drivers and an office manager. A lot of his customers (mostly local businesses) use his services on a regular basis, but some are one-time customers.
Some of these one-time customers are consumers. David requires that one-time customers (and consumers) pay for his services by cash or credit card.
Roadhopper's "credit department" consists of David, who usually agrees to bill most business customers -- even when he has not done business with them in the past. His office manager sends out bills to his regular business customers once a month. Payment is required within 30 days.
David's office manager sends out payment reminder letters when an account is 30 days, 60 days, and 90 days past due. Each letter is a bit more forceful than the last.
If an account is over €500, David calls the customer on the phone when the account is 60 days overdue, and asks the customer to promise a date when payment will be made.
If payment is not made, David calls the customer again when the account is 90 days old. Because Roadhopper does not investigate the financial condition of its customers or do any up-front approval, it has a higher number of past-due accounts than companies that do investigate and analyse customers prior to extending credit. David figures that it would cost him more money to hire and train additional staff to do that than it costs him in "charged-off" accounts.
When accounts are 120 days past due, Roadhopper "writes-off" past-due accounts. The office manager continues to try to collect accounts under €100 by sending the customer monthly past-due notices.
When they are 120 days past due, all accounts between €100 and €1,000 are turned over to a collection agency. The collection agency keeps 50pc of the amount it collects on each account and remits the balance to Roadhopper.
When they are 120 days past due, David files suit in a small claims court. When he filed his first two or three cases, David paid his attorney on an hourly basis for advice on how to prepare for and handle the case.
David now feels comfortable with handling small claims cases himself. He has been successful in getting judgments from several deadbeat customers.
David turns over all accounts that are 120 days past due and have balances over €5,000 to his solicitor. David's solicitor takes the cases on a "contingent fee" basis, which means that the attorney keeps a certain percentage (35pc) of the amount he collects as a fee.
Morton is a wholesaler of plumbing products. Morton has thousands of customers. Morton is large enough that it has its own credit and collections departments.
The credit department is responsible for deciding which of its customers will receive credit terms, and which of its customers must pay in cash.
The credit department requires that each customer requesting credit terms complete a credit application and provide company financial statements and credit references.
A decision whether to grant or deny credit to a customer is based on specific criteria in Morton's written credit policy.
The collection department is responsible for collecting past due accounts. Past-due notices are sent on a periodic basis to all accounts.
Telephone calls are made on a regular basis to accounts over €1,000. Morton writes off all accounts that are over 120 days past due.
When they are 120 days past due, Morton sells accounts with balances over €1,000 but under €20,000 to a collection agency. The collection agency pays Morton 50 cents on the euro for the accounts.
When accounts over €20,000 are 120 days past due, Morton pays its solicitor on an hourly basis to collect them. Sometimes, its solicitor collects the account simply by writing a demand letter.
Other times, its solicitor must go through the process of commencing a lawsuit and obtaining a judgment against the customer. Morton's solicitor also helps Morton collect on any judgments obtained.