CFO Magazine's July 2018 Metric of the Month: Uncollectible Balances, by APQC’s CFO Perry D. Wiggins discusses various collection practices associated with Top Performers under the metric of “Total Uncollectible Balances as a Percent of Revenue,” which is part of APQC’s Customer Credit and Invoicing Open Standards Benchmarking survey.
While Wiggins describes methods to collect balances, I want to take a different approach and discuss “When Should You Write-off Balances Rather Than Continue Trying to Collect.” I can see three clear cases for moving to write-off. They all begin with the letter “D” – Disputes, De minimis, and Defunct.
- Disputed Amounts – As a young accounting manager, I looked for senior partners of the firm that could serve as mentors to help guide my career. One such partner was Bob Phillips. He was the picture perfect southern gentleman. I never saw him flustered or ruffled by anything that happened yet he seemed to be the person senior leadership always selected to go in and handle difficult client matters – and billing disputes were some of the tough issues he handled.
In a quiet moment one day I had the opportunity to ask him how he had acquired this skill set and how he was able to satisfactorily resolve so many issues. What he answered was a big surprise. He said, “Steve, I often have the benefit of not knowing what the facts are.” I quickly asked how that could help. Bob went on to explain that in most disputes the different parties have fundamental disagreements over what happened because they see what happened through only their viewpoint. In most cases they are incapable of seeing the other party's point of view because they are so busy explaining their view.
By not knowing the disputed facts, Bob could focus instead on the desired outcome. In nearly all cases, both parties were focused on the disagreement. Bob focused parties on getting to outcomes that both sides felt good about.
When you have a customer with what they consider to be a valid dispute, do not let collections destroy your client relationship. The lifetime value of customers is typically far greater than a single transaction. Use the issue as a learning opportunity to make sure it never comes up again.
- De Minimis Amounts – A second problem to avoid is spending more money to collect a balance than the balance is worth. You see this any time you receive an invoice or a monthly statement for a small amount. The company spent more in printing the statement, preparing the collection letter, and paying the postage for the mailing than the amount of money they were trying to collect.
Develop a policy to handle balances below a certain level. Better yet, track items on specific invoices and work with your customers to make sure they are paying specific charges. Any differences would get flagged and jointly discussed with your customers to make sure your records match and are efficiently processed by both sides.
- Defunct Accounts – Collection departments must pay special attention to accounts that have wavering financial viability. Customers who are on shaky footing should be monitored and potentially moved to alternative credit terms. Sales teams need to be alerted to both involuntary as well as voluntary bankruptcy filings. Of the two, voluntary can be the most dangerous as some companies will attempt to load up on inventory prior to filing because they know replenishment inventories will be harder to get after bankruptcy filings.
Management teams should be prepared to step in whenever customer bankruptcies occur. Many companies can reorganize under Chapter 11 of the Bankruptcy code. Smart management teams will have lined up special lines of credit to support their post-bankruptcy activities. As a supplier, you need to likewise have identified your team members who are trained in dealing with customers who are going through bankruptcy. Organizations typically move receivables of bankrupt customers into separate categories for detailed monitoring.
The bottom line is you want to collect amounts owed to your organizations. Just always evaluate whether it is worth the cost of your time. Also, be careful not to dump these uncollectible accounts on collection agencies. If you did not want to harass on-going clients over a small amount, using a collection agency to do it will create a result that is twice as bad.