Most organizations may have experienced collection problems especially if there is difficulty in establishing an effective collections team. Many factors can cause collection problems such as poor management practices, untrained staff and insufficient systems. The collections department of an organization may be having difficulty in getting support to change the current system of accounts receivable. In other cases, the company may be understaffed and lack the manpower to pay attention to the past-due accounts receivable. This is a common problem that may mean looking outside of the organization for help.
Outsourcing Using a Collections Agency
The company can address the problem by choosing to outsource an entire function of the collections department or only a few critical functions. If the company decides to outsource, the accounts receivable aging report will be sent to a collections agency for turnover. The collections agency functions as the outsourcing service provider by contacting all the customers of the company with past-due accounts. Accounts that are 60 days old or whatever period specified by the company, are considered overdue.
The company is responsible for receiving the funds collected. The collections agency may require a certain percentage from each invoice collected as a form of payment. Other agencies are paid by the hour for their services. It is wise for a company to continually measure the performance of the collections agency. If the agency has a low percentage of invoice collection, switching to another agency is a good idea.
Things to Consider
Before planning to outsource collections, the company should consider the different factors. One thing to consider is the cost. There are costs to having an outsourced collections company but these have to be weighed up against the benefits that the agency can provide (staff that are trained & motivated to collect debts, the other better uses of your staff’s time in making money for you etc). Another thing to consider is the efficiency of collections in the long run. If the company plans to create an effective in-house collections department, staff should reinforce their training and skills. Purely outsourcing the collections function will not solve the underlying problems that cause the customers of the company to miss payments.
Managing Credit Risk
In order to manage credit risk, a company will have to learn how to balance credit sales including the profits earned against the risk of granting credit to a customer. There is no fool-proof way to manage these factors. The right balance of credit risk depends on the strategic goals and profit margins set by individual companies.
One way to manage credit risk is to set a credit limit per customer type. This should be standard for new customers. The assigned credit limit should be based on the customer’s credit history including credit score. If the company has high-risk customers, a special provision about a reserve for bad debt should be in place. A payment schedule should also be set to ensure that customers will pay on time. Consecutive late payments and delinquency should not be tolerated. This will allow the company to manage credit risk more effectively.
The Cash Protection Agency is a debt collection agency offering debt collection and credit control services. We would be happy to help your company collect its debts and deal with any underlying issues in billing and collecting money from your clients. Call us on 0800 433 4113 or contact us online.