Collecting outstanding debt is a vital part of any business. It's not glamorous and can even be a little uncomfortable. But the dangers of not collecting on debt owed are much greater than a few tough conversations or bringing in a collection agency. In our post-pandemic state of "normalcy," it may not be apparent how long a creditor should wait to pursue monies owed.
Needless to say, we live in a markedly different world since COVID-19 hit the United States shores. Before that time, the country was experiencing the longest economic expansion on record. Debt collection took a major shift during the pandemic. In many companies, it was halted, or it slowed down considerably. The flood of government aid, along with the sudden contraction in spending, led to an unpredictable economy. Industry experts expect that it will take years to understand the impact of this debt collection halt.
There's no one rule of thumb concerning how long a creditor should wait to press clients for payments now. The answer to that question could vary depending upon who you ask within your company.
The sales team, which is the backbone of the media industry, usually views collections as a problematic situation. Sales will agree that a valuable service was supplied to the debtor and payment is expected. But to avoid upsetting a debtor and risk the loss of future business, they would rather postpone collection action as long as possible. Landing a customer takes time and money. Losing one to a late payment is a danger, but hopefully avoidable.
Ideally, collections departments would like to receive payment in accordance with their companies' terms. Realistically, we know that this isn't always going to happen.
Credit risk is significantly increased once invoices age more than 60 days past due. Time is the most important factor when collecting debt. The sooner the collection process starts the better the odds are you'll be paid the full amount owed. After just a few months of non-payment, you'll collect only about 73 cents on the dollar on average, according to debt collection statistics. Go unpaid for six months and chances are you'll only collect half of the original debt.
So, what should collections departments do? Communication with the sales manager (SM) and the account executive (AE) managing the debtor's account becomes crucial when the debt is over 60 days past due. Understanding a debtor's reason for nonpayment is key. Don't allow receivables to get too old before having a discussion with the AE and SM, as they are key to acquiring accurate information about the status of the account and repayment options. In particular, the AE is the collection team's ears and eyes on the debtor's business.
Give them the opportunity to reach out to the debtor. Ask for feedback once they have. Making frequent contact makes the debtor aware you're on top of collection effort, and they are more likely to pay. If you let a debtor know you value their business and are willing to help them through a rough patch, it is a sure way to create a valuable customer for many more years to come.
Also bear in mind that almost 30% of customers use delayed payments as a form of financing. This should concern all of us because of the ripple effect delinquent payments have on the creditor. It can be summed up in a very simple equation:
Receivable + Time = Exponential Cost
According to a report published by Fidesic Corp., the cost of managing receivables comes to around $8.44 per invoice. Approximately 90% of that cost is labor related. The higher your days sales outstanding (DSO), the more administration costs increase.
Business revenue is calculated months in advance based on projections. That expected future cash flow is often allocated to other departments to help your company grow. Unpaid past-due invoices not only affect cash flow; they also affect the entire way a business operates.
When a debtor is having problems paying their expenses, they often prioritize which ones are the most important to pay first and will delay payment to the rest. If they know your company is not aggressive in following up on late payments, they will not put you on the priority list.
Clients form late-payment and non-payment habits. So counteracting that tendency by attempting to collect outstanding debt should become a goal for all of us.
This story was written by J. Dee Stevenson, the Corporate Credit and Collections Manager at Gray Media Group. She can be reached at dee.stevenson@gray.tv.
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The opinions expressed here are the author's views and do not necessarily represent the views of MediaVillage.com/MyersBizNet.