Managing a small business requires the ability to wear many different hats and look at situations from many different angles. Any healthy business has many different working parts running at the same time. Sometimes things run smoothly and these parts operate in perfect harmony, and sometimes things need to be adjusted.
When it comes to the accounting department, there is a huge difference between recording profit from sales and actually developing a steady positive cash flow. Many times these two components operate in harmony with one another and increased sales lead to more cash flowing into the business.
There are also times when sales made by extending credit to customers delay the cash flow. This makes it possible for a business to be very profitable on paper, yet heavily bleeding cash in reality. This is why any good business will look to find the perfect balance of sales and cash flow and adjust its credit terms accordingly.
Late Payments from Credit Customers
Even when a company believes it has established a healthy practice of extending credit, a sudden change in the economy or some other factor can lead to customers that are unable to make payments on accounts where the sales have already been recorded. For a business that was relying on cash flow from its credit customers, this can be a death blow.
It doesn’t take a genius to realize that the longer an account is delinquent, the lower the odds are that it will ever be brought back to good standing. Every day that goes by without a payment significantly reduces the odds of ever recovering the amount owed by the debtor.
Having a Plan for Delinquent Accounts
Many smart businesses have a specific plan for how to handle delinquent accounts. An example might be the following:
- At 30 days past due, a customer is officially classified as a debtor.
- At 60 days past due, a debt becomes considered “past due.”
- At 90 days past due, a debt becomes considered “delinquent.”
- At 120 days past due, a debt is sent to a collection agency.
This plan would also likely include written notices and phone calls at each level to inform the debtor of the increasing severity of their outstanding debt.
The Time Factor
While this plan is certainly better than having no plan at all, it overlooks the critical time component with respect to getting the debt collected. Because every day that passes makes it less and less likely that the creditor will ever be made whole by the debtor, waiting until the debt is 120 days old before hiring a collection agency makes it exponentially harder for the agency to collect the debt.
The same exact collection agency will be able to produce significantly better results if they receive a debt that is 60 or 90 days past due, as opposed to 120 days past due. For this reason, you should seriously consider revising your existing debt collection strategy and calling in the professionals at an earlier point. Bringing in a professional debt collection agency earlier in your process will often allow them to collect more than they would have if you waited, this difference might even offset their contingency fee.
There are many other factors involved in debt collection. Some industries consider 60 days past due normal, while others consider that to be extremely late. That means that you will have to adjust your plan for you industry, but the same timing principle applies: The sooner you get the professionals involved, the better chance they have to actually collect on the debt.
Because it can be a tremendous asset to have a team of professional debt collectors on your side from the very moment a credit situation with one of your customers goes bad, you might even want to consider having a standard debt collection agreement with a collection agency. This could be as simple as agreeing to forward to the agency any debts that reach a certain number of days without payment.
Bringing in a collection agency that understands the impact that time can have on an outstanding debt is the best way for any small business to take some of the stress off of their plate. As long as the contingency fees are reasonable, this is almost always a good idea.