When To Place

When to place an account for collection should be viewed through the mindset of risk aversion. Some of the signs and signals of increased risks that a credit professional must consider include but are not limited to: the passage of time, margin markups, how write-offs affect profits, days past terms, corporate red flags, employee-generated red flags, NSF checks and what industry experts say about placement timing.

Factors For A Successful Recovery

Having an Early Detection procedure which is the process of reclassifying a customer
to a debtor as quickly as possible then taking immediate steps to mitigate the potential
loss.

1. Being the first to proceed with collection steps.
2. Using an agency with an effective recovery ratio.
3. Recognizing “RED FLAGS” and immediately reacting.
4. Start in-house collection procedures at ten days past due.
5. Upon discovery of Successor Liability factors – place for collection
6. Determine at 30 days past due if the receivable is a placement candidate.
7. Recognition of a write-off, the relationship to sales and how it affects that profit.

Other characteristics must come into play when evaluating when to take action on a delinquent
account. Collection professionals should always consider the following known facts:

1. 95% of all receivables are paid by seven days past terms
2. After thirty days past due the probability of collecting a receivable decreases 10% per month over the next eight months.
3. Your DSO delinquent balances should not exceed 33% to 50% of the selling terms. If terms are 30 days, then an acceptable DSO is 40 to 45 days.
4. Businesses operating on a 6% net profit (national average) must generate $17,000.00 in sales (17 to 1 ratio) on a $1,000.00 loss before profit making resumes.

5. An agency’s recovery ratio affects bottom line profit more so than an agency’s fee structure.
6. Beyond past due a debtor’s available cash flow pool shrinks exponentially. Place an NSF check for collection if restitution is not complete within two weeks of original tender.

7. Act immediately when experiencing Corporate and Employee red flags. Banks consider a 60 days past due receivable of no value and marginal value at 30 days due.
8. Thirty days past terms represents an extension of 100% beyond good, prompt paying customers.
9. If a business or business assets are sold should any factor of successor liability be uncovered, then the overdue balance should be immediately placed for collection.

What Experts Say About Placement Timing

According to Collector Magazine, a creditor should be ready to initiate placement with an agency 90 days after the invoice date or the equivalent being 60 days after terms. Placement prior to this time should be initiated if any “Red Flags” are observed. Minimally, the Credit Department should start in-house collection steps at ten days Past Due Terms (PDT) followed by 3 more attempts within 30 days thereafter. If at any time after PDT when there is no response to a final ultimatum, which may be on the heels of a broken commitment, then it is time to place the overdue balance with an agency. Other indicators suggesting the immediate need to place would be a debtor’s refusal to provide a specific deadline date for payment. “Taking care of the account” is a generic stalling tactic and not a realistic commitment for payment. The nebulous promise to pay, based on nebulous income sources is a precursor to a broken commitment. Disputed claims raised within terms are almost always legitimate. An initial claim of dispute raised beyond invoice terms is probably the most common unfounded dilatory tactic of all.

Banks and lending institutions believe a receivable has very little real value at 30 days past terms (DPT) and absolutely no value at 60 days past terms. Borrowing covenants requiring a specified asset to liability ratios will always exclude receivables as assets if 30 days past terms. When reviewing financials, closely place emphasis on the Current Assets and
Current Liability ratio. Place minimum importance on Net Worth and goodwill, as these tend to be overstated.

Typical National Bad Debt Write-Off Statistics

Companies that grant credit may experience a typical write-off percentage for a year as follows:

LOW – .065% (.00065 x Total Sales)
IDEAL – .2% (.002 x Total Sales)
GOOD – .3% (.003 x Total Sales)
HIGH – .5% (.005 x Total Sales)
DANGER – 1.0% (.01 x Total Sales)

The dollar equivalent of the bad dept write off percentage is expressed by the respective numeral equivalent multiplied by Total Sales as shown between the parentheses above.

LOW, IDEAL, GOOD, HIGH, DANGER – These typical percentages are national averages. It is more important to place weight amongst industry comparisons assuming that such figures are available. Bad debt allowances have a tendency to be higher than the national norm when overall industry margins are high. Sometimes this serves as justification for greater allowance of write-offs. If write-off percentages land in the lowest quartile of the statistics, then credit is too tight. An exception would be a startup company, a company with low sales volume or a company that is financially strapped.