Page 145 - Accounting Best Practices

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Collections Best Practices
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or it charges an hourly rate for its efforts. It is almost always less expensive to pay
an hourly fee for collection services, rather than a percentage of the amounts col-
lected, though going with an hourly approach gives the supplier less incentive to
collect on old invoices. To counteract the reduced level of incentive, it is useful to
continually measure the collection effectiveness of the supplier, and switch to a
new supplier if only a low percentage of invoices is being collected. This can be
an effective approach for quickly bringing a trained group of collection profes-
sionals to bear on an existing collections problem.
Before deciding on the outsourcing route, one must consider a variety of impor-
tant issues that make this a solution for only a minority of situations. The first prob-
lem is cost. It is always cheaper to keep the collections function in-house because
the fees charged by any supplier must include a profit, which automatically makes
its services more expensive. This is a particularly important problem if the payment
method is a percentage of the invoices collected, since the percentage can be consid-
erable. Another problem is that this approach does not allow one to use most of the
other best practices that are discussed in this chapter—by moving the entire function
elsewhere, there is no longer any reason to improve the department’s efficiency.
Only a few best practices, those that involve other departments, such as the sales and
credit departments, are still available for implementation. Finally, and most impor-
tantly, outsourcing the collections function puts the emphasis of the department
squarely on collecting money, rather than on the equally important issue of correct-
ing the underlying problems that are causing customers to not pay their bills on time.
A collections supplier has absolutely no incentive to inform a company of why cus-
tomers are not paying, because by doing so it is giving a company information that
will reduce the number of overdue invoices and reduce the amount of its business.
For example, if a customer does not pay its bills because a company repeatedly mis-
prices the products it is selling, the collections agency will not inform the company
of its error because then the invoices will be fixed and there will be fewer invoices to
collect. All of these issues are major ones, requiring considerable deliberation before
a company decides to outsource its collections function. Typically, this best practice
should only be used in situations where a company wants to outsource the collection
of a few of its most difficult collection problems. In most other cases, it is infinitely
less expensive to go in search of a qualified manager who can bring the collections
department up to a peak level of efficiency.
Cost: Installation time:

7–6 SIMPLIFY PRICING STRUCTURE

A common problem for the collections staff is when it tries to collect on an
invoice that contains a pricing error. This problem most commonly arises when
the order entry staff has a complicated set of rules to follow when deriving pric-
ing. For example, rather than using a single price for each product, there may be a