As a 25-year veteran of the Credit and Collections industry and now with a primary focus in third-party collections, one of the most frequent discussions I have recently had with both collection industry peers, clients and prospects is what is the appropriate third-party collection placement strategy for a B2B company? What constitutes serious delinquency? How long after invoices go past due has the customer reached the “point of no return” and should be placed with an outside agency? What is the optimal placement policy that ensures the highest possible recoveries?
In a typical credit and collection department, accounts are considered actionably delinquent somewhere between being 30 to 60 days past the due date. In the real world, if an account is a few days late, often your collectors are not going to hassle the customer too much for fear of upsetting your relationship with them. If you have implemented risk-based collections and are using an order-to-cash workflow solution you probably have strategies designed to auto-treat many of these customers.
However, at 30 days past due your collection strategy probably directs your collectors to call the customer and try to collect the receivable. But, most companies will not start really squeezing their accounts, until they are 45-60 days past due. At that time, depending on the organization of the credit and collection department and their resources, delinquent customers are likely to be turned over to the internal collection team who will begin to initiate recovery procedures.
Now let’s look at this from the viewpoint of a typical internal collector who is responsible for managing an account portfolio, all of which are in various stages of delinquency. The collector’s goal is to collect as much as they can and our experience says that accounts that are most current are the ones most likely to pay and will get the primary focus. As noted above, the older an account gets the lower the probability they are going to pay and as accounts age one of two things is going to happen, either they will eventually pay or they won’t. Accounts that don’t pay, as they age, will continue to become harder to collect and given your current collection environment will these severely delinquent customers continue to get the collection focus they need?
If you look at the percentage of a delinquent portfolio recovered by your collectors as a function of days past due, you will most likely see an extremely skewed distribution. When a delinquent customer is initially turned over to the internal collections team, the recoveries during the period until the accounts are 120 days past due will be material. Perhaps 50% of the initial value will be recovered. But, after 120 days almost nothing additional is likely to be collected. And the main reason for this is that given most companies collection resources, collectors are not actively working the older accounts, but focusing instead, on the more current accounts that are the easiest to collect. This practice means that the un-collected delinquent accounts will continue to age and a drag on your balance sheet.
Given this scenario happens so often, why do so many companies wait until an account is 180 days past due or even older before turning it over to a collection agency? It just doesn’t make any sense.
Take in mind that accounts turned over to a collection agency have first been handled by a company’s collection department usually for at least 90 to 120 days – unsuccessfully. But a good collection agency will eventually recover 30%-50% of those receivable. Why? Because an agency is an expert in handling these types of accounts and they don’t cherry pick based on age or dollar amount, they work them all. That’s why you can expect the types of recovery % mentioned above even on accounts that have been turned over even at 210 days past due. However, if the accounts are turned over sooner say at 90 to 120 days past due, the collection rate may go even higher. It a proven industry fact, holding on to delinquent receivables for too long will cost your company money.
As a participant at the upcoming CreditScape Fall Summit, September 17-18 at the Tropicana in Las Vegas, I will address this topic in much more detail. For more information about the conference, visit www.creditscapeconference.com. I hope to see you there.
Sam Fensterstock is senior VP of Business Development for AG Adjustments. He will be participating in a panel discussion on Collections Compliance and Best Practices at the upcoming CreditScape Fall Summit, and can be reached at email@example.com.