Blood from a stone
Time for the baseball bat?
So, when is it appropriate to call in outside muscle? Mark Boughton, CFO of technology services provider Venue Solutions, says he’s only had to do it once at a previous post. ‘It was a decision taken after six or seven months of haggling with the company, getting promises made just to keep us quiet. I felt it was appropriate in this case and the debt collection agency used strong-arm tactics and just camped in their lobby, refusing to leave until they got a cheque. I prefer to meet with the FD and work something out with them – everyone can have credit problems at some point.
‘Another time, many years ago, one large customer of the company I was working for was growing very fast and we were concerned about their ability to pay. We worked out how much of our stock they needed and limited the amount we sold them, so that they paid off what they owed before we supplied them any more. I would go to their office each time and made sure I came out with a cheque. We also had an agreement with them that if they did go belly up we would be able to come into their warehouses and get our stock back. We had to cover ourselves, but at the same time we worked it out amicably with them and it maintained the working relationship.’
When it comes to keeping up a relationship with a recalcitrant debtor, PwC’s Roberts urges you not to throw good money after bad: ‘If they’re a good purchaser but a bad payer you have to think about whether you want to continue dealing with them.’
Calling in the big boys
Apart from situations when the occasional bloody-minded customer seems unwilling to pay their bills, a collection agency is also advisable if you are dealing across borders. There may be many cultural differences as well as the obvious difficulties of language barriers. Another instance where it might make sense is if you have a large number of customers who represent a small value of debt. Lots of work for less reward means it makes sense to use a debt collection agency. Although they may have a mixed reputation, figures from trade body the Credit Services Association (CSA) indicate that its members recover up to £5 billion each year. Fees charged by debt collection agencies vary, around ten per cent of the amount recovered being common – and some agencies offer flat rates. Make sure you’re using a reputable firm, registered with the CSA.
Owen James is director of Intrum Justicia, a Scandinavian company offering debt recovery as one of its services. He says that companies such as his can crunch through large numbers of calls with great results, and that the industry is losing its old reputation as being harmful for clients’ reputations. ‘We’re very tightly regulated and it’s becoming more acceptable in Europe to pursue customers for overdue debt.’
Such agencies can reach the parts normal credit controllers cannot reach. ‘We’re trained to negotiate and can deal with industries like catering and entertainment, where, if you call during normal office hours they won’t be there.’
James is even humble enough to suggest how businesses might be able to circumvent the use of a collection agency. ‘It can make an overnight difference if you link sales remuneration to actual payment of invoices, rather than having bonuses paid based just on billed revenue.’
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How to tell if you have unsuitable levels of debt
A few warning signs that should make you sit up and do something:
• Overdue balances representing more than 20 per cent of total accounts receivable
• Accounts 90 days overdue representing more than three per cent of total accounts receivable
• Bad debts more than 0.5 per cent of annual sales
• Unbilled revenue more than seven days’ sales
• Unallocated cash more than one day's cash receipts
• Average number of monthly credit notes more than five per cent of the average number of invoices issued
• Account balances over their
credit limits
• Undocumented credit policy and procedures
• A high proportion of temporary credit staff