After having described all the collection activities from customers who pay on time and the activities to prevent a customer from entering into an overdue debt, we will focus on the area of overdue debt collection.
At this stage, for some reason, the customer did not pay his debt to the organisation on time, and the debt is now defined as an overdue debt. From this point, the time that passes becomes a critical factor, because additional debts may accrue to the customer, and accordingly – the resources needed to collect the money will increase and the chances of collecting all or part of the debt will decrease. As more time passes from the agreed payment date, the chance of full or partial non-collection increases.
The process of collecting delinquent debts is progressive, meaning a process that progresses and develops gradually. Its beginning – a formal demand for payment from the customer, identifying the reasons for non-payment and providing a response. If the customer still does not pay, collection efforts are initiated that become more intense over time. At each stage, the collection manager must decide the feasibility of investing efforts, which resources or tools to use and which types of customers to deal with first. Diagram 26 – the collection funnel of overdue debts – graphically describes the process. The use of the funnel model is not accidental but is intended to illustrate the structure of the collection process that begins with a large number of customers and initiated events, and at the end of which customers remain who are transferred to legal treatment and some of them may be written off as bad debts.
The collection as an industrial production line
We would like to present the collection process as a type of industrial production line: any interruption in the production line, or any accumulation of customers or lack of resources throughout the process, will result in the accumulation of overdue customers, damage to the efficiency of the work process and ultimately damage to customers, cash flow and the profitability of the organisation.
The customer falls into arrears: a control mechanism is proposed to estimate new debts and prevent them.
Quantitative monitoring of the new debts that “come” into arrears on an ongoing basis (monthly) allows us to closely monitor the effectiveness of the actions taken by the organisation to prevent overdue debts. The need for this is essential: strict control of the new receivables will allow us to identify negative trends at an early stage and begin to investigate the causes of the changing trends. The analysis of the new debts must be carried out at several levels and depends on the collection characteristics of the organisation.
In an organisation that obligates hundreds of thousands of customers every month through bank standing orders, about 3% of the total standing orders broadcast are not honoured. One (not) bright day, the amount of “declined” began to grow steadily from month to month and within a few months reached 4.5% of the total number of payments. There was no reasonable explanation for the change, and the distribution of the decline reasons was not uniform – but the percentage of declines arising from the banks’ notification with “no authorization” began to increase relative to the other reasons. Also, the large number of committed customers greatly reduced the likelihood that there was a sudden change in the behaviour of the customers.
After a careful analysis of the process, it was discovered that due to a technical fault, the organisation stopped removing cancelled standing orders from the list of charges, therefore every month more and more cancelled standing orders accumulated were sent to be collected and obviously were returned. Without a monthly analysis of the number of new debts, it would not have been possible to withstand the 1.5% increase in defaults – and the organisation would have had to react at a later stage after the accumulation of its customers’ debts.
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Control reports to monitor new debts in arrears:
1. Over time, monitor the distribution of the number of new debts in arrears and their amounts by methods of payment. If you have customers in open credit, they also need to be monitored when entering arrears.
2. Monitoring over time the rate of new debts from the cycle (in amounts and quantity) as well as according to their distribution to the various means of payment (for example, the proportion of new debts in bank standing orders from the general circulation – according to amounts and customer numbers).
2. Analysis of customer data entering the overdue collection process for the first time (customers who were not in debt in the previous month). This report will allow us to isolate the new debtors from the rest of the delinquent debtors and analyse trends that characterize them.
3. A long-term analysis of the amount of new debts (in amounts and number) according to the reason for entering into debt – for example, we would like to distinguish between non-respect of standing orders for technical reasons (which must be dealt promptly with the customer) and non-respect of a commitment that indicates a customer liquidity problem.
4. Analysis over time of the number of new debts and their amounts according to the type of service or product of the organisation can reveal problems related to a particular product or service. For example – a decrease in the quality of a certain product line can result in an increase in the number of customers in arrears as a result of customer dissatisfaction;
5. Analysis over time of new debts (in amounts and number of customers) according to sales channels may indicate a problem with the quality of sales in a specific channel. Sometimes, the analysis can even be reduced to the level of the individual sales representative.
6. Long-term analysis of new debts (in amounts and number of customers) according to geographic areas or different population sectors.
7. Analysis of new debts for those with a high degree of risk – there is a special interest in regularly monitoring the accumulation of new debts with the customers that the credit control department has defined as customers potentially at risk.
8. When different centres in the organisation handle the new duties – it is desirable to carry out long-term control overtime on the quality of the treatment of the new duties by the different centres and to identify individual changes in quality among the centres.
Next: Debt collection in arrears, phase 1: Demanding payment from the customer