Business mentor: Chasing debts can be tricky

Q: I have just started as a credit controller in a services business with a $1.5 million turnover. The company appears to have pursued clients regardless of their ability to pay - they seem to put the client relationship ahead of getting the money in and the clients are taking full advantage of this. I'm considering using a debt collection agency, but am concerned that I may alienate our relationships with the non-paying clients to the point they won't use our services again.

* Hellen Riley-Tombs, corporate solicitor of Debtor Management, replies:

A: Businesses today readily recognise the benefits of outsourcing and engaging the services of professionals across areas like debt collection and credit management.

The benefits of this include projecting a professional image for your company and the cost saving of not having to employ and maintain additional staff.

Gains from third-party involvement include being able to have the amount outstanding or the issue mediated, resolved and documented by an independent party, reducing the days outstanding and write-offs.

Additionally, it establishes efficient procedures and control for delinquent debtors and an opportunity to align them with a credit policy. It also educates customers that you expect payment for goods or services supplied and will enforce your payment terms if required to do so.

Finding the correct debt recovery agency is important if you want to quickly reduce overdue accounts. Most commercial debts require a one-on-one approach and to be proactively worked at times "outside the square" for successful recovery, rather than being handled "en masse" with automated processes.

Overdues not appropriately handled can lead to further losses and write-offs.

A professional agency can release hours of valuable time allowing the credit manager to move on with the managing of the daily cashflow, which is the life blood of any business.

However, your third-party relationships should be reviewed regularly to ensure you are getting maximum value from the relationship.

Often people inherit an agency and are too busy to review its performance. It is often difficult to make changes within a company structure, so it may seem easier to leave things as they are, but the cost of this can be high.

There may also be concerns about what will happen to the debts with the current debt collection agency if a change is made.

However, a professional agency should have little problem in assisting a new client through such a transition process.

Remember, the result of continuing with a poorly performing third-party relationship can be damaging to your business's reputation, particularly if people are treated unprofessionally or with disrespect.

As a result, opportunities to recover cash are lost and debtors become unco-operative, adding further cost to the recovery procedure.

Any funds recovered should be accounted for and be placed in a specific trust account. When cleared by the bank, these should be returned to the client monthly.

Other issues to be considered are things such as do you have a one-on-one relationship directly with your collector?

Ensure your agency has experienced personnel who know the relevant acts and legal procedures and are able to recommend the next debt recovery steps.

With regular reporting and contact, you should still be able to maintain control over your debts and how they are handled in relation to the debt amount against the amount of funds spent, with approval for such expenditure being sought prior to conducting any action.

When considering your agency, look for a range of services that includes all-round support as part of your requirement. Do not accept an agency just because they offer what appears on the surface to be a cheap rate. Commissions set by the original debt value submitted and commissions on payments are two different things, so look closely before signing any agreement with an agency.

Look also at the experience and structures within the agency and, with some pre-thought and a few well-chosen questions, it will be quite easy to select a professional third party who will be aligned to your own specific needs.

The collection industry has a national body called the Associated Credit Bureaux.

You can view their website at ACBNZ

* Hellen Riley-Tombs is corporate solicitor for Debtor Management and can be contacted with specific questions on 09 263-9111.

* Email your small business questions to georgina.bond@nzherald.co.nz

* Answers are provided by small business sector specialist Sarah Trotman of Spring Group.


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