Collection Agencies and Collection Productivity 2 Of 2

By Dean Kaplan+

Collection agencies can help improve collections efficiency and productivity
Evaluation of your credit department’s productivity and efficiency may indicate your business should hire a collection agency.

Hiring collection agencies can be one way to increase a credit department’s collection productivity. Since accounts receivable represents one of the biggest assets on any company’s balance sheet, finding ways to increase collection productivity in a cost effective way will usually be looked upon favorably by management. This is the second article in a two part series about collection productivity. This article will discuss how to measure receivables and collection productivity.

There are numerous ways to quantify the management of credit and receivables. One important measure is effectiveness. How effectively is the credit department managing its receivables? To determine this, the credit manager might look at what percentage of accounts receivable are current and what percentage of accounts are past due? Comparing the current month to the previous month and the same month in the prior year can also be a good way of gauging current performance. Similarly, year-to-date data comparisons can also be valuable.

Another measure is to determine whether or not the credit department is performing its functions to the satisfaction of its customers, both internal and external. While this can be somewhat subjective, it is an area which provides a lot of opportunity for improvement. Some measurements of quality might be bad debt as a percent of sales (a low percent indicates high quality of service) or the percentage of customers turned over to collection agencies as compared to total customers (a low percentage would indicate high productivity and positive results by the credit department) or the percentage of orders put on hold due to credit related issues as compared to all orders outstanding (a low percent indicates few credit issues).

How quickly and accurately the credit department performs its functions is also an important measure. Looking at the average time it takes to complete credit evaluations or the average time it takes to resolve deductions issues relative to the company standards are ways to evaluate timeliness.

Finally, looking at the overall results of the credit department as it relates to accounts receivable totals is important. Is the credit department resolving all the issues to minimize deductions and delinquent accounts? Measurements might be deductions as a percentage of accounts receivable and delinquent accounts receivable dollars as a percentage of total accounts receivable.

To determine the productivity of the collections process, we must compare one time period to another. The change will either be a positive number which indicates productivity improvement, or a negative number indicating productivity decline. The best way to look at your particular credit department’s collection productivity is to pick the measurement criteria (such as the performance measures described above), pick the time periods that you want to evaluate, and calculate the changes. When taken together, if most indicators are improving, this would point to a productivity increase. If the change is in the negative direction, then the causes must be identified, and plans made to move things back in the positive direction. Staffing issues can have a definite impact on collections productivity. For example, if sales decrease, and accounts receivable decrease, but staffing has remained constant, this will put downward pressure on collections productivity. Conversely, if sales stay the same and accounts receivable remain relatively stable, but staffing decreases, this will cause collections productivity to go up because fewer people are handling the same amount of accounts receivable.

If collections productivity is on the decline, one way to quickly boost productivity is to hire collection agencies. By turning problem customers over to professional debt collectors, the chance of debt collection success goes way up. Professional debt collectors have a lot of experience dealing with problem customers. They know how to motivate debtors to pay their outstanding bills. They also typically work on a contingency basis, so they only get paid if they collect. Good agencies can bring in accounts receivable collections quickly and cost effectively, making them a valuable asset to credit departments.

Collections productivity is not a simple thing. Many factors can influence productivity levels so isolating key improvement opportunities can be difficult. However, because of the importance of accounts receivable to a company’s profitability, any improvement in handling the accounts receivable function will be noticed and looked upon favorably by management. Collections productivity is definitely worth watching and improving.

Click here if you missed the first article in this two part series Collection Agencies and Collection Productivity 1 Of 2.

The Kaplan Group is a boutique collection agency specializing in large (over $10,000) debt collections due from businesses. Founded in 1991, the company has a stellar reputation (A+ rating with the Better Business Bureau) and is recognized as one of the leading collection agencies for results on large and complex matters.

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