Maximizing Your Ability to Collect, by Sam Fensterstock

One of the most frequently asked questions AGA gets from our clients is “how do we capitalize on our ability to collect from our customers?” Our answer is always the same: to be successful in maximizing your cash flow and reducing write-offs you must have three critical policies in place:

1. A Defined Credit Policy – While most companies have defined policies for best practices when it comes to employment, security and many other facets of their business, many companies we speak to do not have a clear policy when it comes to granting and reviewing credit . If you want to get paid after you have delivered your goods or services, you need to made good credit decisions when you decide to engage your customer. If you have not, your chances of collecting, if there is a problem in the future will decrease significantly. What your credit policy should be? Well, that is something that is hard to answer because it needs to be industry and company specific. However, best practices say it should be based on factors such as company risk tolerance, industry standards, gross profit margins and your internal risk assessment capabilities. The bottom line, a good credit policy will help you minimize your risk while maximizing your profitability. The acquisition of all pertinent information about a company such as a fully executed credit application (with verbiage that allows you to add interest and collection fees), financial statements, industry credit reports, trade data as well as a personal guarantee with home address and cell phone information should be a rule of thumb to most credit grantors.

2. A Defined Collection Policy – Just like with your credit policy, your collection policy should be specifically defined, documented and if possible, best practices recommends the use of an order to cash technology solution to help automate part of the collection process. No matter how your credit & collection department is set up, a pre-determined collection strategy that triggers a set of calls and e-mails with specific grace periods based on promises to pay should be deployed. To maximize collection results, the ratio of customers to collectors must also be taken into consideration, given your technology environment. If you’re in a fully automated collections environment you may be able to do more with less, compared to a manual collection process where you may need more collectors to handle the same amount of customers. As we all know, the sale is not complete until the money is in the bank and a defined collection policy will help ensure that your DSO and write offs are in line with company expectations and industry standards.

3. Having Defined Collection Placement Policy and a Strategic Collection Outsourcing Partner – No matter what kind of credit and collection policies you have in place and even if you have state of the art order to cash technology solution deployed, at some point, some customer will ignore all of your all internal collection efforts and not pay you. This is when we believe you should engage with an outside 3rd party collection outsourcing provider. Determining the “point of no return” with your customers is critical. Your collection placement policy should be specifically defined, as it has a direct correlation to your collection outsourcing partner’s ability to successfully recover what you’re owed. Remember, the older a receivable gets the harder it is to collect, so if you want to maximize cash flow from your aged receivables, you don’t need to “beat your customer to death”, just place them in a timely manner and let your partner do their work and you will see more cash come through the door. A proactive and professional approach will also assist in the possible re-acquisition of your customer.

Also, when choosing a collection outsource partner there are several things you should consider such as;
• Is the agency certified by the International Association of Commercial Collectors?
• Is the agency certified by the Commercial Law League of America?
• Does the agency have appropriate bond and liability coverage?
• Does the agency have web based reporting tools that provide you recovery analytics and 100% visibility into their collection efforts?
• Does the agency have the technology capabilities to integrate with your order to cash platform for automated placements?
• Does the agency provide a competitive rate for their services?
• Does the agency have a good reputation in the market?
• How many years has the agency been in business?
• Can the agency provide multiple references of companies who have been customers for more than 5 years?

Choosing the right outsourcing partner is critical in helping maximize the recovery of lost funds. Why is this so? It’s simple, if your company is earning a net profit of 5% and you write off $25,000 you will need and additional $500,000 in sales to offset the loss. In the long run, the success of your collection outsourcing partner can have a tremendous impact on your bottom line.

Sam Fensterstock is Senior Vice President, Business Development,  for AGA, a leading commercial collection agency based in Melville, NY. He can be reached at (631) 425-8800 or samf@agaltd.com.

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