Most people think that the acronyms and terms they know are common knowledge. But the truth is that every field has its jargon and acronyms. Collections is no different. Whether you’re talking to your accounts receivable department, or hiring a collection agency, you are likely to hear a lot of terms you don’t know. You should never be embarrassed to ask people to define terms, but here are ten common collection acronyms to get you started.
Collection Effectiveness Index. This is a measurement used by organizations to determine how effective their collection efforts are. Many people find the CEI more accurate than the DSO (see below). A basic formula for CEI is the sum of beginning receivables and monthly credit sales, minus ending total receivables. Then, divide that by the sum of beginning receivables and monthly credit sales less ending current receivables. Multiply the answer by 100 to get a percentage. The closer to 100% your percentage, the more effective your efforts.
Doing Business As. Pay special attention to any DBA or AKA (Also Known As) put on your credit application. It’s important to know who you are doing business with and related entities in case anything goes wrong.
Days Sales Outstanding. The average number of days that a company takes to collect revenue after a sale has been made. DSO can be calculated on a monthly, quarterly or annual basis. A basic formula is to divide the amount of accounts receivable during a given period by the total value of credit sales during the same period, and multiply the result by the number of days in the period measured.
End of Month. This is a common invoice term. It’s important to specify if payment is due at a specific point in the month, or after a certain number of days. A MOM (Middle of the Month) payment date is often used as an incentive for a discount.
Fair Debt Collection Practices Act. This is a federal law that limits when and how debt collectors can contact individuals who owe money. The law does not apply to businesses to business debt, nor does it apply to businesses attempting to collect on their own.
International Association of Commercial Collectors. Because collection laws differ from state to state and country to country, there are many associations and organizations for finding a reputable collection agency. The IACC is the primary organization in the United States for business to business (commercial) collection agencies. Always make sure to check for reviews of a collection agency. If they don’t have recent positive reviews on independent websites, then ask for referrals and talk to their existing clients.
Non-Sufficient Funds in the check writer’s bank account. If a check ‘bounces’, it is important to understand why. Besides NSF, we also see ‘account closed’ and ‘account could not be located’. When trying to get paid, it is important to understand the real problem in order to come up with a real solution.
Open Account. This is credit extended by a business to a buyer, sometimes without a specified limit. Having an OA is the simplest method of purchasing product and services. However, it is also the most risky for the creditor. Your customer can quickly and unexpectedly build up a large payables balance and possibly struggle to pay on time. You should not establish an OA with a client without a strong relationship and credit report.
Outside Collection Agency (like The Kaplan Group)
Return on Investment. This is a common business term, but is especially important in collections. Usually, ROI is calculated by subtracting the initial amount invested from the final value. But, with collections, it’s important that you consider the amount of time, or staff hours, you are spending trying to collect on an unpaid bill.
At TKG (The Kaplan Group) we pride ourselves on learning as much as we can about our clients’ business and industry so that we can better collect. We’re happy to help you learn about our field as well.