In some organizations, the true collection costs are of utmost importance since they constitute a large component of the organization’s expenses.
When discussing collection costs, the costs of the personnel directly handling the collection are usually considered, and sometimes, the overhead and administrative overhead expenses are added to them. However, some of the collection costs are not easily measured or visible, as will be detailed later in this section.
We will begin by presenting the cost components according to the main areas of credit risk management and collection:
| Activity | Cost components |
| Credit terms | Agreed credit terms, credit – collections in arrears |
| Methods of payment | Bank fees, processing fees |
| Receivables management | Receivables accounting and cashiers |
| Collections | Collections, call-centres, and pre-legal departments |
| Risk management | Underwriting department, Credit Rating Agencies, Factoring |
| Legal collections | Legal department, legal fees |
| Bad debt | Bad debt expenses |
| Quality issues | Lost salesman and other department time involved in the collections process, management time, credit or discounts and monitoring resources on credits, customers churn. |
| Infrastructure | Premises and systems dedicated to collections |
Before detailing the various cost components for each of the areas of activity, we will present in a comprehensive manner the costs pertaining to all the departments and units dealing with these issues:
Personnel and infrastructure costs
Credit terms costs
Payment method costs
Receivables management costs
Accounts receivable management – personnel and infrastructure
These are all accounts receivable management operating costs, including personnel, office infrastructure and systems infrastructure.
Cash register – personnel and infrastructure
This component includes all the operating costs of managing the cash registers, including personnel, office infrastructure, systems infrastructure, and other direct expenses, such as secure transport of funds and cyber security.
Collections costs
Risk management costs
Credit control department – personnel and infrastructure.
Risk management, beyond the cost of the manager himself, is carried out by the employees of the credit control department and the physical and automated infrastructures necessary for carrying out their task.
Business information
These are the costs for the variety of services provided by the companies for business information (see Chapters 7, 8, and 9 within the framework of credit risk management), including fees paid to government databases such as the Registrar of Companies, the Registrar of Liens, or a credit data service database and more.
Hedging credit risks
We extensively reviewed the subject of credit hedging in chapter 10, where the variety of options for hedging credit risks were described and the various costs involved in purchasing insurance were mentioned.
Legal collections costs
Legal collections department – personnel and infrastructure
This section includes the cost of the legal collections department in the organization for all its components, including personnel and infrastructure.
Legal expenses
The Section on the management of legal proceedings covers this topic in detail. These are all expenses related to legal collections from customers, including fees for external lawyers, court fees, skip tracing and delivery, and service for control software.
Costs of bad debts written off
One of the main components of collection costs is the bad debts themselves. For the most part, the collection managers/credit and collection risk managers do not tend to see them as part of the costs, even though the bad debts are the direct product of the activity of the credit and collection system.