Collections - What does it REALLY cost?

"It's not what you pay a man, but what he costs you that counts." - Will Rogers



There is so much truth, on so many levels, in that simple little statement. But business is what we do, right? So based on that premise, let's ask and (hopefully) answer a few questions about the real cost of doing business, especially as it relates to accounts receivable.

1. How much are you paying the person that is pursuing the accounts that are in you 90-day+ columns? I find that the answer to this question doesn't really matter. No matter how much it is, there are much more productive ways to spend their salary. This person should be making money for your business, but if they are chasing bad debt, you are loosing at least twice their salary. Why? You are loosing whatever profit you could be earning by having them work on more productive projects, plus they obviously are not recovering the money that they are chasing so you are loosing that too! Put them to work making you money, and let a contingency based collection agency chase the old receivables. It costs you nothing unless they are successful!
2. How much does it cost to let the accounts continue to sit on your aging? Statistics show that of accounts that are allowed to go 90 days past-due, 73.1% ever get collected. At 180 days that number drops to 50%; 210 days = 40.4%; 365 days = 25%; 2 years = 10.5%. Are you starting to get the picture? Our contingency rate for accounts less than 365 days past-due (and still in business) is 15%. Here is an example of how we can MAKE your business money (notice I said make, not save). Say you place an account that owes you $1000, at 90 days past-due. We collect the entire $1000, and charge you 15% ($150). You have already saved or recovered 11.9% (based on the national average quoted above of 73.1%), plus you have earned whatever profit the person that you would normally have had chasing this debt within your organization has been able to create for you. Make sense? Now remember, these are folks that are refusing to pay (by either saying they can't or won't), so we can't guarantee that we will collect all of them, but you are not collecting all of them in-house either. I am saying that we can help increase your profitability over-all.
3. Are there any other benefits to using a collection agency? Well, I'm glad you asked! In most cases, our fees can be written off as a cost of sales expense (speak to your accountant for the specifics). When it comes tax-time, we all comb through our records for every available tax benefit we can find, right? Not to be dishonest (although I am sure there are those types out there), but just to make sure we are taking advantage of every loophole, er.....I mean.....legal write-off that we can find.....wink, wink! Really, as stated above, this is a legitimate, cost of sales, write-off in most cases.
4. Why not just initiate suit? I have two answers to this question, and they depend on how much you are pursuing, so we will start small: A) Small claims - Someone within your organization has to take time out to go to the courthouse, file a claim, and then show up at any proceedings. Plus, whatever the charge is to do that in your local jurisdiction. - COSTLY! Then add travel expenses, if your customer is not local. If your company has a website, this is a more and more common situation. We aren't just selling to the people in our neighborhoods any more, and this is necessary to survive in what has become a global economy! B) Larger accounts - These accounts are going to require an attorney (not the one that you go to when you have legal corporate questions, but a collections attorney). This is both COSTLY and very TIME CONSUMING! Again, if your non-paying customer is not local, this presents a whole bunch of other hurdles. Now add to both of these scenarios the fact that once you get a judgement, you still have to collect on it, and I think you will at least start to see my point. Yes, a small number of accounts that go to collection still end up needing to be sued, but we have lower costs options for that as well. One reason being that we do a lot of the leg-work for the attorney ahead of time. And it didn't cost you a dime!

I hope that I have helped answer some of your questions regarding the True Cost of aged accounts receivable. If you want help collecting, we can do that too! Contact me by phone at (800) 313-9611 Ext.103, or by e-mail at neil@hamiltonandmonroe.com.

Happy Monday!