When to place an account for collections should be viewed through the mindset of risk aversion. There are signs and signals of increased risks with the statistics clearly favoring a client that takes immediate action upon recognition of a debtor’s financial difficulties.
This section examines factors that a credit professional must consider up to the exact moment that a decision is made when an account is placed for collections. Accordingly, such a decision must be weighted by the passage of time, margin markups, how write-offs affect profits, days past terms, corporate red flags, employee-generated red flags, NSF checks and what some experts say about placement timing.

THE MOST IMPORTANT KEYS LEADING TO A SUCCESSFUL RECOVERY ARE:

  • Having an “Early Detection” procedure which is the process of reclassifying a “customer” to a “debtor” as quickly as possible then taking immediate steps to mitigate the potential loss.
    Being the first to proceed with collection steps.
  • Using an agency with an effective recovery ratio.
  • Recognizing “RED FLAGS” and immediately reacting.
  • Start in-house collection procedures at 10 days past due.
  • Upon discovery of Successor Liability factors – place for collections
  • Determine at 30 days past due if the receivable is a placement candidate.
  • Recognition of a write-off, the relationship to sales and how it affects that profit.

Other characteristics must come into play when evaluating when to take action on a delinquent account.

Collection professionals should always consider the following known facts:

  • 95% of all receivables are paid by 7 days past terms.
  • After 30 days past due the probability of collecting a receivable decreases 10% per month over the next 8 months.
  • Your DSO “delinquent balances” should not exceed 33% to 50% of the selling terms. If terms are 30 days, then an acceptable DSO is 40 to 45 days.
  • Businesses operating on a 6% net profit (national average) must generate $17,000.00 in sales (17 to 1 ratio) on a $1,000.00 loss before profit making resumes. An agency’s recovery ratio affects bottom line profit more so than an agency’s fee structure.
  • Beyond past due a debtor’s available cash flow pool shrinks exponentially.
  • Place an NSF check for collection if restitution is not complete within 2 weeks of original tender.
  • Act immediately when experiencing Corporate “RED FLAGS”.
  • Banks consider a 60 days past due receivable of no value and marginal value at 30 days due.
  • 30 days past terms represents an extension of 100% beyond good, prompt paying customers. If a business or business assets are sold should any factor of successor liability be uncovered, then the overdue balance should be immediately placed for collection.

NSF CHECKS

NSF CHECKS PLACEMENT PHILOSOPHY – Passing NSF checks and failing to make immediate restitution means that a total financial collapse is imminent. The only exception would be an accounting error, which the debtor can correct immediately. If you are unable to obtain full restitution in the form of guaranteed funds within two weeks, then the overdue balance created by the NSF check should be placed for collection immediately. We caution that a part payment should never be accepted on an NSF check, as this negates debtor criminal liability. Accepting part payments serves as absolution and forgiveness of the NSF act. You will hear all kinds of excuses; however, regardless of what a debtor may give you, rest assured the debtor is insolvent.
NSF-BAD CHECK LAWS – Every state has statutes on the books that spell out criminal penalties related to the remitter’s failure to make immediate and full restitution on NSF checks. The reality is that our public law enforcement officials are dedicated to home security, theft and violent crimes of a felonious nature. Prosecutors, district attorneys, and county attorneys realize that on a business transaction, creditors have NSF check remedies available to them through civil procedures. Thus, criminal pursuit of NSF check violators is practically non-existent.

WHAT SOME EXPERTS SAY ABOUT PLACEMENT TIMING
According to Collector Magazine, a creditor should be ready to initiate placement with an agency 90 days after the invoice date or the equivalent being 60 days after terms. Placement prior to this time should be initiated if any “Red Flags” are observed. Minimally, the Credit Department should start in-house collection steps at ten days Past Due Terms (PDT) followed by 3 more attempts within 30 days thereafter. If at any time after PDT when there is no response to a final ultimatum, which may be on the heels of a broken commitment, then it is time to place the overdue balance with an agency. Other indicators suggesting the immediate need to place would be a debtor’s refusal to provide a specific deadline date for payment. “Taking care of the account” is a generic stalling tactic and not a realistic commitment for payment. The nebulous promise to pay, based on nebulous income sources is a precursor to a broken commitment. Disputed claims raised within terms are almost always legitimate. An initial claim of dispute raised beyond invoice terms is probably the most common unfounded dilatory tactic of all. Are the customers disputes real, or just another stall tactic to avoid payment?
Lending institutions believe a receivable has very little real value at 30 DAYS PAST TERMS (DPT) and absolutely no value at 60 DAYS PAST TERMS. Borrowing covenants requiring a specified asset to liability ratios will always exclude receivables as assets if 30 DAYS PAST TERMS. When reviewing financials, closely place emphasis on the Current Assets and Current Liability ratio. Place minimum importance on Net Worth and goodwill, as these tend to be overstated.