Debt collection strategies

Debt collection strategies are needed to maximize the efficiency and effectiveness of the collections team. Ultimately, the result should be more collected funds in relation to the collection effort expended. This is an especially important issue when the accounting department is facing a reduction in its budget. Debt collection strategies are different from the more tactical methods used to actually contact customers regarding overdue payments.

A suggested set of debt collection strategies to consider are as follows:

  • Ease of credit granting. Debt collection begins with a decision about how much easy credit a company wants to grant its customers. This is a management decision that should involve a discussion about the impact on bad debts and the investment in accounts receivable.
  • Prioritize collections. It usually makes the most sense to direct the collection staff at the largest invoices, since the return on their time is greatest. An alternative is to use a third party credit analysis firm to determine which customers are in the best financial health, and target those invoices payable by them.
  • Tools to be used. Part of debt collection strategy is deciding which collection tools are to be used. For example, will the company accept converting an overdue receivable into a loan? Will it accept returned goods? Should it take customers to court? These decisions may be based on the company's need for working capital, how rapidly its products lose value, and so forth.
  • Collection agency handoff. Define the point at which invoices are to be handed to a collection agency. There should be a definitive point at which this transition takes place, such as after 90 days or after the fourth customer contact. The main point is to avoid dragging out the handoff, since doing so results in a stale receivable that is much more difficult to collect.

Whatever the decisions may be regarding the preceding strategies, be sure to put them in writing. Then make a note in the department calendar to revisit the documented strategies at regular intervals to decide whether any changes should be made. A shift in strategic direction could be triggered by a change in general economic conditions or the competitive stance of the company.