(This article originally appeared in the Monitor in November 2001. The Monitor is a leasing industry publication.)
MANAGING ACCOUNTS RECEIVABLE PORTFOLIOS IN TROUBLED TIMES
By
Emil Hartleb
Executive Director
Commercial Collection Agency Association
Commercial Law League of America
Are we in an economic slow-down or recession? We’ll leave that determination to the economists!
We know that in the current economic environment, with slowing sales, there is a renewed focus on cash flow and its importance to the overall health of a business.
There are several key elements to the cash flow equation and a company’s accounts receivable portfolio is certainly one of them. Today, businesses are looking for better ways to manage their accounts receivable portfolios to improve the portfolio’s turnover and consequently enhance cash flow.
In the current economic environment, slow paying and delinquent accounts are on the rise, thwarting those efforts. In the third quarter of 2001, the Commercial Collection Agency Association reported a 24.4% increase in the dollars placed with its members for collection. On a year-to-date comparison basis, an almost 20.0% increase was recorded.
These statistics confirm what many accounts receivable managers know; this is a difficult period in which to manage accounts receivable. The job of managing becomes tougher as businesses tighten their belts and reduce staffs. Doing more with less becomes the norm.
Continuing a trend, started way before the current economic environment began, more and more companies are currently exploring and utilizing accounts receivable management outsourcing. This is part of the growing trend in business to outsource non-core activities, freeing companies to build upon their core competencies. Outsourcing, in all its forms, has become an important strategic management tool. Many companies are outsourcing a growing list of functions that includes order entry, billing and collection, human resources administration, purchasing and disbursement, cash and investment management, tax compliance, internal audit, payroll and customer relations.
A recently completed CFO Magazine and AMR Research study found that 68.3% of the companies surveyed currently engaged in some form of business process outsourcing, or as it has become to be called BPO. Traditionally, outsourcing has played a major role in the information technology function of business. However, many analysts believe the market for business process outsourcing will grow faster than the more traditional IT (information technology) outsourcing market.
The survey also revealed that outsourcing is here to stay with 63.8% of those surveyed indicating they would increase their use of outsourcing. While 28.6% indicated they would keep their outsourcing activities the same. Only 2.4% of survey respondents indicated they would decrease outsourcing activities and about 5.3% had no idea of their future plans regarding outsourcing.
John Hagerty, a vice president in the financial services practice area of AMR Research of Boston says, “... by reducing asset utilization and subcontracting a process to an expert, a company obtains more controllable costs.”
While reducing and controlling costs are important benefits to consider with accounts receivable management outsourcing, there are other equally important ones to keep in mind:
Outsourcing the management of the accounts receivable portfolio with an outside expert can lead to an improvement in cash flow.
Enhanced customer contact brought about by the improved efficiency of the outsourcing provider often leads to earlier detection of customers’ unhappiness with products and services and allows earlier resolution of these problems, resulting in improved customer satisfaction.
Reduced expenditures on the information technology infrastructure. The outside expert is able to provide the technology to more effectively manage the accounts receivable management function.
It is important to understand that accounts receivable outsourcing is not traditional third-party collection services. It requires that the provider be expert not only in managing the servicing of an accounts receivable portfolio but also highly proficient in the customer service function as well.
Your customers, the outsourcing provider is interacting with, are customers you highly value. The outsourcing provider needs to be as equally focused on customer service issues as they are on the financial issues of their assignment. Preservation and enhancement of customer good will are important skills the outsourcing provider should bring to their assignment.
Selecting a partner to manage your company’s accounts receivable portfolio requires that you not only evaluate the outsourcing provider’s competency in the process of servicing the account receivable portfolio but also their skills in preserving and enhancing your customers’ good will.
Many members of the Commercial Collection Agency Association (CCAA) are pioneers in accounts receivable management outsourcing. They possess the critical expertise needed to make the outsourcing of your company’s accounts receivable management function a successful one. The outsourcing services a CCAA member can provide are comprehensive. Not only can they provide for the servicing of slow paying accounts, they can also provide cure programs on past due customers, work out voluntary surrender of leased equipment and resolution of deficiency balances, as well as, providing access to attorneys who have expertise in replevin and other legal remedies through the Commercial Law League of America’s Triadic Network, should those actions be necessary.
If you have any questions regarding accounts receivable management outsourcing; please contact the Executive Director of CCAA, Mr. Emil Hartleb at (973) 239-0721 or by email at ehartleb@ccaacollect.com.
Improved management of the accounts receivable portfolio will usually result in a lower number of seriously delinquent accounts. However, it is unlikely the issue of seriously delinquent accounts will be eliminated. Most accounts receivable managers are aware that using collection agencies to collect delinquent accounts is an effective tool that is available to them. The question is not whether to use a collection agency, but when is the appropriate time to use an agency and how does one select a collection agency.
A company does not want to prematurely use collection services, perhaps injuring customer relationships and incurring unnecessary costs. Generally, in the past, we have recommended that when an account is 120 days delinquent (ninety days after the invoice due date), a creditor should consider placing the account with their collection agency, particularly if no response has been received from the customer. In the present economic environment that time should be shortened to 90 – 100 days delinquent or sixty to seventy days after the invoice due date. At that point, most creditors have sent out a number of statements and collection letters and made several collection calls. They have tried to bring to the customer’s attention the delinquency and their concern about it. The customer’s lack of response to collection calls and letters indicates either a lack of concern or a cash flow problem. In either case, a collection problem exists and the account should be placed with a collection agency.
There are times, however, when a creditor should place an account earlier. The following provides a guideline to such events:
Two broken promises of payment. Payments were promised but no checks have been received, and the customer will not send immediate payment by overnight delivery.
Customer’s telephone is disconnected. Double check with telephone information, and if no new listing is available, place the account immediately.
The customer repeatedly requests documentation even though they have been supplied the documentation previously. This common practice is used to delay payment of the account.
Your customer indicates an inability to pay and refuses to provide a specific date for payment or to initiate a realistic payment schedule. This is a sure indication of a serious cash flow problem and immediate steps should be taken to protect your company’s interests.
Your customer states they will “take care of the account,” but refuse to make a realistic commitment for payment or to work out a payment schedule. This is another indication of a serious cash flow problem.
The foregoing provides a guideline for effectively utilizing the services of a commercial collection agency in today’s economic environment to maximize collection results.
The other question often asked is; “with so many collection agencies out there; how do I select one?” That task has been made easier as a list of agencies certified by the Commercial Law League of America (CLLA) is readily available on the Website of the Commercial Collection Agency Association (CCAA), www.ccaacollect.com. The Website also contains information on the certification program and how this program benefits you, the credit grantor. A hard copy roster is also available. It can be obtained by contacting CCAA’s Executive Director, Emil Hartleb at (973) 239-0721 or emailing him at ehartleb@ccaacollect.com and requesting it. The roster can be sent by mail, fax or email. When requesting a roster, please designate how you desire the roster to be sent to you.
Working with a CCAA certified member agency, you can feel confident that:
Its members adhere to a strict Code of Ethics, which assures the use of reputable, professional collection procedures. Abusive or harassing techniques are grounds for the loss of a member agency’s certification by the Commercial Law League of America.
Your collected funds are maintained and accounted for in separate Trust Accounts.
You will receive timely reports, verification of collected funds and prompt remittance of those funds.
CCAA certified member agencies, in aggregate, handle over 75% of the collection accounts placed each year with professional commercial collection agencies in the United States, so you know you are dealing with a group of professionals that are highly experienced in what they do.
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