As most business people know, the more past due your receivables become, the less likely that you'll collect what is owed. In speaking with commercial collection firm, Leib & Company in Mt. Laurel, NJ it occurred to us that this area of concern warranted a special issue of our newsletter. For manufacturers, retailers, lawyers, doctors, distributors, and accountants - you name the business or profession - the collection consultants at Leib & Company have provided us some insight on the collectibility of past due accounts as they age.

Here is the data:

The figures clearly reveal the decline in value with the age of past due accounts, and they certainly support the need for firm and aggressive collection efforts in any organization. If your collections are deteriorating, you might want to discuss the situation with us, your attorney and a collection consultant in order to examine your practices and recommend modifications. Read on.

It's not uncommon for a customer who has run into financial difficulty to make a partial payment of an invoice and write on the check: " Payment in full." If you receive such a check, although you should check with your attorney, you should be relieved that we understand a customer cannot make a unilateral accord and satisfaction and force a vendor to accept a reduced payment. Instead, the party who presents the check must make clear by conspicuous wording that the cashing of the check will be construed as a settlement of the outstanding amount owed. Thus, the check or the accompanying payment voucher would have a notation such as "payment in full of the stated amount" or "endorsement of the check constitutes a full settlement of your claim". This enables the recipient to determine whether to accept the lesser payment or not. Under the Uniform Commercial Code, a vendor can avoid an accord and satisfaction by returning the money tendered within 90 days. However, crossing out such a restricted endorsement and adding the words "without prejudice", and then cashing the check will be deemed an acceptance of an accord and satisfaction that terminates the recipient's right to the amounts still owed. In any event, the mere notation "Payment in Full" does not of itself impair a recipient's right to collect the balance of the amounts owed. You should check the proper handling of these payments with your attorney to protect your rights and establish appropriate business practices.

For business owners who are now fretfully sitting on their "dormant dollars", we asked Robert Leib, the founder and president of Leib & Company, a commercial collection firm, for some helpful observations and suggestions on how to change "cash slow" into "cash flow".

In our experience, most delinquent accounts are one of two types: Slow -Pay or No-Pay. They call for different kinds of handling. The Slow-Pay requires tender, loving care, understanding, sympathy and patience (up to a point). The No-Pay needs persistence, insistence and a forceful strategy that must be tempered by knowledge of how far the law will allow you to push. And don't automatically believe that a No-Pay will never again become your customer. If handled properly, with due respect and creativeness, he may come back into your fold, sadder but wiser.

While some collection agencies rely on a series of letters using progressively stronger language, we put our faith in the phone company. Our firm knows that a mailman doesn't collect money. A person does - a person with persuasiveness, persistence and professional know how.

A letter doesn't allow the vital, personal interaction between the debtor and the creditor or his agent. But telephone conversation between the two allows the collector to decide when to use the carrot and when to use the stick. Quickly and intuitively sensing and evaluating the debtor's voice tone and response, the seasoned collector can shift his strategy while the conversation is progressing - searching for an agreement.

On the other hand, the No-Pay debtor is usually the monster-creation of an unresolved dispute. The work wasn't completed to the customer's satisfaction. The "wrong" size or color or material was delivered, he says, so he refuses to pay - all or part.

This is where a third party, the collection agency, may be most effective in mediating the disputed claim. Sometimes the two principal parties (creditor and debtor)) are past speaking terms. Their talks have ground down to impasse. A persuasive and persistent collection agent can become the golden go-between because he isn't caught up in the emotional aspect of the dispute. The professional collector's appearance on the scene allows the creditor to compromise or reduce his expectation without admitting it to the debtor's face. Meanwhile, the debtor may be willing to settle just to get the creditor off his back.

A professional collection agency offers a company several advantages over trying to collect its own receivables:

In an age where extended credit is the life blood of business, the professional collection agency can be the catalyst that keeps the cash flowing. Just like accounting and law firms, the collection agency has its own specialized function. In addition, it permits the business owner to concentrate on what he does best - producing the product or service that he sells.

It's not unusual for a good customer to run into financial difficulty. Usually this will become apparent as a result of slow payments or information you might pick up from the grapevine (or better yet, see our suggestion regarding DebtWatcher). If you want to continue doing business with the customer but are concerned about a possible bankruptcy, here are some suggestions. First of all, maintain complete records showing when goods or services were supplied and the date of each payment you received. In addition, you must try to tie new shipments closely to these payments. This can be done by:

You can obtain collateral if you want to minimize risk. This can involve use of standby letters of credit, advance deposits, third-party guarantees and the rendering of a purchase money security interest as protection if the goods are sold. Once you suspect a problem, it is more important than ever to identify your credit exposure, get updated credit reports and obtain current financial statements and perhaps visit the debtor's premises to get a first-hand impression of what's going on.

Of course, if you do have customers with marginal credit ratings, you are likely to be in a dilemma about whether to risk extending credit or take a chance on losing the customer. Fortunately, this is not an "either or" decision and prudent business people have alternative options for doing business with high-risk customers without risking the entire sale. Options, which we have come across, some of which we've already alluded to, are:

With some thought or ingenuity it is almost always possible to structure a sales transaction in a manner that mitigates the risk sufficiently to enable the seller to proceed. Clients consult us and their attorneys regularly about financial arrangements that provide protection against credit losses.

Factoring (the sale of accounts receivable to a finance company) was once associated with the garment industry and with companies that had severe financial problems. But in recent years, as major banks have gone into the factoring business, and as the practice has spread to the construction, healthcare, food distribution, trucking and other industries, factoring has been legitimized. Attitudes have certainly changed over the last 20 years and many businesses routinely factor their receivables. Among the advantages of factoring are:

In factoring, the business owner sells some or all of the receivable to the factor who advances between 50% and 80% of the face value of the invoices. The factor assumes the risk and responsibility of making collections. Factors usually offer small businesses so-called discount pricing which is an inclusive fee covering credit, collections, cost of funds and servicing ranging from 2% to 7% of the invoice amount. Typically, this fee is in the 4% range, and extra charges may be imposed if payment is not received within the specified payment period. Alternatively, when dealing with larger companies, factors will unbundle the costs into separate elements consisting of a commission for administrative services, credit and collection in the range of 1% to 2% and annualized interest on the funds employed at rates varying from prime plus 1% to prime plus 4%. Although factoring is costly, it accelerates cash flow by providing the business with cash almost immediately after a sale, as opposed to a delay of 30 days or more for a typical cash payment. When we help clients locate a suitable factor, we suggest an analysis of the fee schedule and an evaluation of the reports provided on payment activity to insure that the factor's numbers can be audited.

Many physicians, attorneys, accountants and other service professionals are so busy dealing with their patients/clients and dealing with the professional side of their practice that they avoid any involvement in the accounting or administrative areas of practice management. Nevertheless, one area with which the professional/owner must be directly involved is the write-off of bad debts. Many practice embezzlements are perpetrated by someone stealing cash receipts or even checks, then writing-off the outstanding balance to which the payment had not been posted. In effect, since there is no open balance neither the patient/client nor the professional is aware of the misappropriation of the payment. Some other reasons why professionals/owners need to be involved with accounts receivable write-offs are to:

If you are concerned about excessive involvement on the clerical side of your practice, you might establish some minimal amount, even as low as $25, that may be written-off without your approval since this will still protect your practice from anything worse than petty theft by a dishonest employee.

Speeding up collections should be on every business owner's mind. Therefore, we thought a few more tried and true ideas could be useful:

Although your collection practices won't change the customer's overall habits, when you are forceful, your invoices will hopefully go to the top of the pile, and someone else's will end up being paid last. Let us know if you are having problems in this area so that we can help evaluate your procedures and perhaps recommend techniques for energizing your cash inflow, even if it means recommending a collection agency or lawyer.

As your business grows, you'll eventually have to delegate more and manage the functions indirectly by monitoring the performance of those who now have responsibility. One of the operational areas that must be watched closely is the credit and collection function. Following are some typical measurement tools for determining its effectiveness:

In many instances, only some of the measurements will be needed for monitoring purposes. The ideal way to measure performance is to compare results from period to period, and over a time frame such as 6 months or a year. Finally, you might also benefit by obtaining some supplemental information such as the number of new accounts opened as a percent of total open accounts. All of this data provides information that lets you determine the effectiveness of your credit and collection function and whether your policies are being complied with. Conferring with a CPA firm (like ABO and Company) and collection consultants (like Leib & Company), can often provide a full range of systems and procedures for operating a sound credit and collection function that is customized to your business.