The administrative tool known as the “debt waterfall” provides the collection manager with an overall view of the integrity of the collection processes and their relative efficiency. The next principle expressed here is that the behaviour of the collection system should be consistent over time, and any change requires an explanation.
The starting point of the waterfall is the billing of 100% of the organization’s customers – the top marker of efficiency in the collection process. We will illustrate the issue in chart-table 34 below:
Diagram 36: Efficiency table of the various stages of the collection process
| Collection stage | Percentage of collection in money | Percentage of collection in number of customers | Time in the collection process (days) | Percentage of the cost of collections from income | Collections cost distribution | Cost per Pound/ Dollar /Euro collected |
| Sales | 100% | |||||
| On-time collections | 56% | 56% | 0 | *2% | 34.5% | 0.10 |
| After request letters | 20% | 76% | 10 | 0.1% | 3.4% | 0.05 |
| After collection calls | 8% | 84% | 20 | 0.4% | 13.8% | 0.35 |
| After disconnection warning | 6% | 90% | 30 | 0.2% | 6.9% | 0.10 |
| After Legal warning | 4% | 94% | 44 | 0.2% | 6.9% | 0.15 |
| Pre-legal collections | 3% | 97% | 58 | 0.5% | 2% | 0.20 |
| Legal collections | 2% | 99% | 88 | 1.% | 32.5% | 0.30 |
| Bad debt | 1% | 100% | 120 | 1.00 |
* On time collections cost are the fees paid to payment processors (including pre-authorisations and rejected payment fees).
In cases where the distribution of the collection from sales is not uniform, another table must be drawn up in the same format based on the breakdown of the collection according to the number of customers at each stage.
Such a monthly table should be prepared, and the changes in the rates of the various collection stages should be monitored over time according to the goals set by the organization. Any change in the rate of one of the components or steps in the collection process requires the attention of the collection manager as to the reasons for the decrease in relative efficiency. Also, any change in the collection costs of each stage requires an examination as well as action to correct the situation.
It is important to pay the same attention to unusual improvement as unusual deterioration. Sometimes, an unusual improvement without a reasonable explanation may hide a problem in the collection systems, such as the lack of proper recording of the new debts and more.
NEXT: Additional control reports to manage collection operations.