Cleaning up A/R: Dealing with High Dollar Invoices

We started taking some of the smaller dollar accounts to small claims. If they have assets they could lose, they will respond. It they don't, you can at the very least get a judgment against them and when they start making money again be able to collect at a later date...that is assuming they don't file for BK. The filing fees are minimal but the downside is (in California) the amount can't be more than $2,500. (except for the first 2, which can be for $5,000).

As the former CFO of a large marketing and sales firm serving customers like The Home Depot and Wal-Mart, it is important that you handle these large customers with care. The objective is to get paid and keep the customer, right?

Find out who is the main contact for each client within your company. Discuss the past due situation with that person and get a clear understanding of what was promised versus what was delivered to the client. Ask the main contact to help you protect the relationship with his/her client, they will appreciate the opportunity to safe gaurd the relationship they have worked hard to build and not hamper opportinities for future sales. If possible have them call their cleint contact and inquire who you should talk to at the cleint's company. Once you are assured that the services promised are what was delivered, then make the call. Start out by introducing yourself and asking the cleint if there was an issue with your service. If they say no, you can then state that your company delivered what was promised and you would appreciate their help in in getting the invoice paid,

If you still don't see any movement towards payment, move up your corporate ladder to get assistance. I would not hesitate to go to your president and ask them to call their counterpart at the cleint. As long as you are approaching the situation as protecting the relationship with your cleint, you will find people in your company will be helpful.

If you find your company did not deliver what was promised, find out what it will take to fix the problem and get the right person in your company to take immediate action. You will never get paid for a service that the cleint feels fell short.

Last resort, negotiate the value the cleint feels they actually got for your services and ask for that payment. You can always go after the rest, if you feel you should.

Two important points in this process, getting the cleint to agree your service was performed to their satisfaction is as good as a proof of delivery receipt. You can use this to go directly to the cleints CFO for payment. Second, if you are able to nefotiate a partial payment, you have proven that the service had value that the cleint paid for, if you decide to persue the balance by collection or legal action.

Good luck.

I agree with Howard, particularly on his two closing points. Lastly, don't hesitate to get an attorney involved prior to litigating the big balances. I've seen amazing results from attorney demand letters over the years.

Piggybacking on the comments above, I have made specific collection assignments in credit and then paired the collector with the marketing contact--a joint approach that seemed to protect the relationship and cashflow. Also, agree that legal stationery has an interesting way of getting the account's attention. That, however, is a last step. You can also change credit terms. Long ago, when I worked for an energy company, we put the airlines on pre-pay for jet fuel, for collection reasons.

There are several good suggestions from others. However, I disagree with Nancy's scorched earth recommendation. Both of those steps are options but other approaches may be more effective and produce a longer-lived solution.

The relationship and the collection process/solution must be looked at in total. Cutting off further work may assure that the delinquent AR will never be collected or collected only through expensive and protracted legal action. If the delinquent amount is material to the customer, consider getting them to commit to a payment plan for the delinquency and tie delivery of further work to their adherence to the plan.

The strategy of dinging the "sales rep" or relationship contact has received a lot of press recently, especially in matters relating to financing activities. To be successful, such expectations and consequences ideally should be set in advance instead of reacting to a negative event and they should be applied fairly across the board, i.e., not just sales. Did the sales person do what the employer asked to obtain and price this business? Was the sales person professionally deficient in his/her duties? Is there a history of delinquency from the customer(s)? Were others responsible for pricing, structuring or (credit) approving the transactions or performing diligence on the customer or order? Is there a clear and consistent practice or (written) policy about compensation adjustments in delinquency or write-off (which, apparently, has not occurred) cases?

Regardless of what happens with these troubled accounts, build on your comment about vetting the existence and appropriateness of purchase orders before starting future work. Accompany that with a more robust and timely collection strategy. When an account exceeds 90 days, the odds of recovery are already greatly diminished.

Prospective and longer-term solutions might include implementing a documented and fact-based customer credit approval process for each order; adopting and adhering to a solid write-off policy so that financial consequences of delinquency and collection failures are visible and real; steadily increasing the collection effort as accounts go past, say, thirty days; having a dedicated person or team responsible for accounts with greater delinquency; producing and distributing to affected parties weekly or monthly reports showing problem delinquencies, collection goals, strategies, action steps and the parties responsible, timing and actual results; engaging management, sales and legal as well as appropriate others early in the discussion in order to understand actual reasons for each delinquency and to get a unified approach that includes real solutions.

I agree with Nancy Leach strongly - perform a commissionectomy on bad debt accounts. Profit is an opinion - cash is a fact. Also, extend short term notes to certain customers rather than fighting against the grain for your money all up front. You can expect 18% interest and if done right additional security on your receivables.

I think the easier way to approach the commission aspect is to start at the beginning. Make getting paid your commission based upon receipt of payment from the client within a certain time frame. At my company we allow an additional 90 days from the payment terms before commissions are lost permanently. That gives the sales person the ability to let the client pay instead of hounding them in advance of the due date. Hounding negatively impacts the relationship between the salesperson and the client.

So many good ideas here, so let me be brief:

1. as you work through the list, consider a triage approach; e.g. the younger an overdue debt, the more likely you can collect a higher % than an ancient amount-so maybe start with the high value, most recent debt?
2. get a team to work on extracting evidence (e.g. proof of delivery, continued use of services, no record of complaints etc) so that when you meet your customer, you are not hampered by lack of facts to press your claim for some money
3. get sign off from your boss (CFO or COO or CEO) on your action plan; then communicate its importance to your sales colleagues/CMO because they must not see this as a threat to them, but as a necessary business initiative that they need to support.

I had to do this with a single customer when I joined a company-it represented 20% of sales and its AR with us was a disaster. I recovered over 90% of the balance.

I also agree with Nancy. Most companies I know of take back commission, wether employee or independant sales rep. It is a control. View it from the other side, of not taking back commissions on bad debt. Not doing so is an incentive to sales reps (especially unscrupulous ones) to get any sale, even cramming sales to less than credit worthy accounts. As noted by Jim, this is a policy that must be set in advance, and will not help with current collections.

There are a lot of good points here. I do agree with taking back a sales person's commission but only as a last resort. Collections isn't their job, however if they have some "skin in the game" they can be very helpful in vetting a customer's credit worthiness. Some of Jim's points are good for service companies. However, if you are sending product out the door, you want payment and sometimes holding up an order is the only thing that gets their attention. We have a dedicated person for collections who will send statements, letters, make calls for about 60 days. If that person can't get anywhere, she will ask the sales person to make a call to their contact to find out what is going on. Then myself or the President will make a call. Then it will go to collections or an attorney. It sounds like Anonymous doesn't have a defined process to monitor receivables/collections. I would also recommend a collections module or collections software that integrates with your accounting system. They are worth their weight in gold. Good Luck!

The most effective way to collect starts upfront. Establish and enforce credit limits on customers and don't routinely ship more to past due accounts... there are always exceptions but in general don't throw more effort into a doubtful account. If you can enforce these through your system, so much the better. Why have your warehouse pick an order for a customer on credit hold? Use your energy to service customers that pay timely.

Set up your commissions so they are paid based on collections. It's fair and doesn't put anyone in the position of "taking back" a commission based on bad debt, you simply pay when you get paid. No one can really argue they should get paid for a sale you don't collect on.

Presumably you are offering your customers a good or service they value. Unless they are in constant contact with you with credible reasons why they shouldn't pay you timely, then you owe it to the organization to keep it focused on your good customers, not spend time and energy chasing dodgy ones.

Some very good comments. Some that I didn't see (and they are disparate ideas, so don't look for direct connections between them):

Start early on in the collections process

Always be nice, nasty can only be followed up with a S&C

Before you go to a collections agency, why not negotiate that fee % off your bill, and just get paid faster?

Make sure your paperwork is in order before you finish/consummate the transaction (saves time later).

The CFO should have developed relationships with mid-sized clients on up. This then becomes an easier collections call, and maybe a heads-up from the opposite number before there is a problem.

Collecting upfront is a good way to approach this. Establish a (for example) 85% upfront prior to shipping/start of services if feasible. Clearly state the limits in a LC. Don't provide additional services/products until the 85% has been received, especially with the delinquent customers.

This way, you are spending more time on the good customers and less time running around the customers who don't pay.

Also, before you get the attorneys involved, make attempts to communicate with the customer a few times. Sometimes these issues get resolved with no legal action and that's always beneficial for both parties.