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Collections Best Practices
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receivable is not collectible, which the controller must then review and sign. The
form is filed away, possibly for future review by auditors. This can be a time-
consuming process, but a necessary one if the amount of the bad debt is large.
However, some bad debts are so small that the cost of completing the associated
paperwork exceeds the bad debt. In short, the control point costs more than the
savings for small write-offs.
The obvious solution is to eliminate approvals for small amounts that are
overdue. A company can determine the appropriate amount for the upper limit of
items that can be written off; an easy way to make this determination is to calcu-
late the cost of the collections staff’s time, as well as that of incidental costs, such
as phone calls. Any account receivable that is equal to or less than this cost
should be written off. The timing of the write-off, once again, depends on the par-
ticular circumstances of each company. Some may feel that it is best to wait until
the end of the year before writing off an invoice, while others promptly clear
them out of the accounts receivable aging as soon as they are 90 days old. What-
ever the exact criteria may be, it is important for management to stay out of the
process once the underlying guidelines have been set. By staying away, manage-
ment is telling the collections staff that it trusts employees to make these deci-
sions on their own, while also giving managers more time to deal with other
issues. If managers feel that they must check on the write-offs, they can let an
internal audit team review the situation from time to time.
By avoiding the approval process for writing off small accounts receivable,
the collections staff avoids unnecessary paperwork while managers eliminate a
waste of their time.

Cost: Installation time:

7–8 COMPILE CUSTOMER ASSETS DATABASE

If a collections person finds that a customer will not pay, the usual recourse is to
reduce or eliminate the customer’s credit limit and to use threats—dunning letters
and phone calls. These instruments are frequently not sufficient to force a cus-
tomer to pay. However, what a collections person does not always realize is that
there may be some other customer assets on the premises that the company can
refuse to ship back to the customer until payment is made. When these assets are
grouped into a database of customer assets, the collections staff has a much better
chance of collecting on accounts receivable.
A customer assets database lists several items the customer owns, but which
are located on the company premises. One common customer asset is consigned
inventory. This is stock the customer has sent to the company either for resale or
for inclusion in a finished product the company is making for the customer.
Another customer asset is an engineering drawing or related set of product speci-
fications. Yet another is a mold, which the customer has paid for and which a