Why Delinquent Accounts Require Swift Action, by Sam Fensterstock

When an accounts receivable ages past its due date, it is vitally important to take positive action, not only to maintain a healthy cash flow but to adapt to constantly changing market conditions. In our current economic times, a savvy management understands that managing the cost of doing business is vitally important. Cash is king, and too many delinquent accounts can bring your business to a standstill. Don’t let current economic conditions provide the basis for extending the time you will permit an account to age prior to instituting formal collection efforts. Relaxing payment requirements will severely impact your company’s cash flow and bottom line.


A survey by the Commercial Law League of America (CLLA) illustrates how much more difficult it is to collect delinquent debt as it ages.

Source: Commercial Law League of America

According to the survey, after only three months, the probability is that you will only collect about $0.71 of each delinquent dollar. After six months, only about $0.55 of each dollar will be collected. And after one year, you will have to settle for about $0.22 of every delinquent dollar. Essentially, time is your worst enemy. The sooner you implement aggressive collection proceedings the better off you will be.


When you write-off an account, cash flow is affected, but so are sales and marketing.

The “multiplier” impact on sales from bad account write-offs is shown in the following table:

For example, a business with a net profit of 2%, that experiences $100,000 in write-offs, requires an additional $5,000,000 in sales to offset the lost profit on the $100,000 in write-offs. Or, if you have a net profit of 4% and write-off $250,000 in bad debts you need an additional $6,250,000 in sales to recoup the lost profit. All the more reason to act sooner rather than later.


The primary reason most companies use a third party collection agency is because their internal efforts to collect the debt have failed and management believes that the company’s resources are best spent making better credit decisions and attending to the customers that are paying their bills rather than wasting their personnel’s time chasing accounts that are not going to pay.

A commercial collection agency is the embodiment of “third party psychology”. Once a third party agency becomes involved the debtor knows that the third party will do whatever is necessary to collect the money due including employing legal remedies if necessary to collect the debt.

A collection agency will not have any sympathy for the stall tactics and excuses employed by debtors. “Third party psychology” will motivate the debtor to pay because they want to avoid the additional costs, and the potential embarrassment that comes with a prolonged collection effort and the possibility of litigation together with negative information provided to credit reporting companies that may impact their ability to get credit in the future.

A professional collection agency has resources, methods and techniques for collecting delinquent debt that are not available to the average company. In some cases, a full asset and liability search is required to understand the current financial situation of the debtor and their ability to pay the money owed.

In particular, an agency has the ability to access databases that may be needed to assist in identifying and locating the responsible party related to the debt and in identifying and locating assets that may be used to satisfying the debt.

State-of-the-art collection software is expensive but vital when pursuing delinquent debtors. Collection agencies today utilize software that merges all account information into a sophisticated database that can be used to coordinate all collection activity, i.e., telephone calls, call history and notes, follow-ups, promises, call-dialers, collection letters series, etc. to maximize the collection process while keeping costs down. The result is a complete record of all collection history and the ability to use this information to make better collection decisions.

The above are only some of the reasons to use a professional collection agency. There are many more, like skip tracing for example, but you get the point.


Professional collection agencies usually work on a contingency fee bases. If they don’t collect they don’t get paid. Additionally, agencies are also adding and collecting the collection costs and attorney fees to the past due balance. This helps to reduce the overall collection related costs if a collection is made. Collection personnel employed by agencies are primarily motivated by the opportunity to make more money. Today, most collection agencies compensate their collection staff based on their performance rather than on an hourly basis. This has increased individual collector performance. In summary, when you utilize a professional collection agency they will exert every effort possible to collect the money due you. If they aren’t successful they have increased their overhead and impacted their bottom line. Not a welcome outcome.


When should you employ the services of a professional collection agency? According to the chart and table above as soon as you are being stonewalled by your debtor. The sooner you act the more likely you are to collect at least some of the delinquent debt. And, the multiplier effect of write-offs is significant. Timing is everything if you want to maximize your cash flow. The increase in debt that is not collectible from 90 days overdue to 180 days overdue is over 44%. Sooner is better!

For information about AG Adjustments and our commercial collection services visit www.agaltd.com or email us at info@agaltd.com.

Tips For Setting Your Automatic Write-off Threshold

Editor’s note: The following article originally appeared in Credit Today, the leading publication for the credit professional, a CMA Partner. Click here for Special CMA Member $10 Trial!

Do you have an automatic write-off threshold for small balances left outstanding on your A/R?

Some companies can research every short payment that comes their way, but for many, it’s simply not practical to do that. To keep up, you must set a minimum threshold, under which you automatically write off everything.

The two key variables to consider when setting this limit are:

  1. The cost to you of researching a short payment, and
  2. The likelihood of receiving payment.

As to number 1, the cost is simple. It’s the manpower required, per deduction, to research. You’ll want to take a couple of weeks and come up with an overall average amount per deduction. Let’s say you come up with 15 minutes per deduction. Then multiply this by the hourly cost of the staff involved.

But your cost is only one part of the analysis in this situation. If you find that traditionally your customers are right 85 percent of the time when taking a deduction (which is the typical average), then you will collect only 15 cents out of every dollar deducted.

At what level does your research become profitable? Do the math. You might find it’s higher than you realized. But two words of caution:

  1. don’t let anyone in your customer base know that you do this, and
  2. periodically research balances lower than your threshold so you can spot abuses.

This article originally appeared in Credit Today, the leading publication for the credit professional.
Click here for Special CMA Member $10 Trial!

Having a Bad Day, by Michael C. Dennis

Michael C. Dennis

A bad debt can ruin a good day. A bad debt is any debt that cannot be collected. Bad debt write-offs are a cost of doing business on open account terms. No matter how carefully the credit department reviews existing customers and new applicants, such losses are inevitable. Bad debt losses are a cost of doing business on open account terms.

When a bad debt loss occurs, you can either lament your losses or learn from them. I encourage you to consider all of the ideas below when such losses occur:

  1. Learn a lesson. Use this opportunity to reflect on what just happened. What could you have done differently? Even if the answer is that the credit department did ‘almost everything’ right, there is still room for improvement. Your goal is to take something positive away from the event, ideally so you can keep it from happening again in exactly the same way in the future.
  2. Keep things in perspective. Even if this is the biggest loss of the year, remember that some level of bad debt write offs are inevitable. Why? Because there is some level of risk in every open account sale. This includes sales to your largest and most creditworthy customers… not to mention the customers you recognize and self-identify as marginal credit risks.
  3. Every bad debt is an opportunity. Write-offs are opportunities to change, to improve and to refine your department’s policies and procedures. Each refinement brings you closer to the optimum internal credit management process intended to properly manage or balance risk and reward.
  4. Seek guidance from management. Use a bad debt as an opportunity to ask for comments, advice and guidance from your manager or senior management. Doing so is not a sign of weakness. It is an indication of maturity, and a great way to make certain that your ‘appetite’ for credit risk is consistent with your company’s taste for risk.
  5. Take responsibility. If you are the department manager, you are responsible when losses occur. This is true even if you personally didn’t take part in the decision-making process. Please don’t try to blame your subordinates. Instead, take the hit squarely in front of your manager and then move on.

I am convinced there are lessons to be learned from every bad debt write off. Among the most common mistakes uncovered are:

  • Information in the credit file was out of date
  • Financial analysis was not done or done poorly
  • The customer was allowed to exceed the credit limit
  • Orders were released while the account was past due
  • The credit manager was not told soon enough to make a difference
  • The collector did not focus enough time and attention on the account
  • The creditor company failed to place the account for collection quickly enough

Each of these mistakes has something in common. That common theme is that if the collection team is provided with clear guidelines and work instructions, fewer mistakes will be made and losses will be reduced

When [not if] bad debt losses happen, don’t lose faith in yourself or in the policies and procedures you have in place. If you ever fall into the trap of believing that what you do doesn’t matter, that idea can become a self-fulfilling prophesy. You will never be able to control all of the external forces that result in bad debts, but you can control what you do and how you respond.

Michael C. Dennis is the author of the Encyclopedia of Credit (www.encyclopediaofcredit.com), a free, fast, internet resource for credit and collection professionals. He is a consultant, and the author of “Credit and Collection Forms and Procedures Manual” as well as a frequent instructor at CMA-sponsored educational events. His most recent book, “Happy Customers, Faster Cash,” is available at amazon.com  He can be contacted at 949-584-9685.

Your Thoughts on 2010 Write-Offs (Poll)

Poll Results - Click to Enlarge

Our poll for February 2011 regarding 2010 write-offs received 263 replies. Participants did not submit any comments to this poll as they have for previous polls.

Overall the news was very good with 43% reporting write-offs that were less than expected and 33% as expected.

10% of the respondents have not yet ended their fiscal year. 13% had more than the expected write-offs, in this unpredictable economy that is a pretty good number.