How to Prevent Debt from Becoming Uncollectable Todd Wahl, President - Hunter Warfield, Inc.
It is a business anyway you look at it A death care professional s accounts receivable portfolio is often a large asset on the balance sheet. It should be regarded in much the same way as any other commitment of corporate resources. You must give the same attention to this capital investment as you do to all other business operations. 2
Develop a Credit and Collection Plan The process is similar to starting a new business - it requires planning, execution of the plan, evaluating the results achieved and making corrections and modifications as required. To be effective, the plans, policies, staffing arrangements and practices should all be consistent with your general objectives of your business. As the business evolves, it will become necessary to periodically review and revise your decisions and plans. If you think your business is too small to justify a formal credit and collection department dedicated exclusively to the function, you should at least have a formal credit policy and collection practices that you follow. 3
Can you handle the credit functions yourself? Many death care professionals who own 1-3 funeral homes* are handling the credit functions themselves, along with other activities, such as purchasing, selling, financial planning and general office management. Even as the business grows many death care professionals find it increasingly difficult to give proper attention to the function of receivables management. Source: Random survey conducted among funeral homes placing accounts for collections. 4
Develop an Action Plan A Plan to Prevent! 5
Establish a Credit Department Starting ti and maintaining i i a receivables management function can be quite a burden for a death care professional that may already be faced with numerous issues and decisions. Most death care professionals are familiar with selling on credit, managing the resulting receivable and even the decision as to whether your customer is a good credit risk may not be as obvious. You may not have ever considered a formal credit strategy or policy. You should! 6
What are the objectives? The goal of receivables managements is to achieve the best combination of profitable sales and timely collection of receivables. The above elements will help ensure a healthy investment in your business operations. Few businesses can be successful if they are not paid for the goods or services they deliver on credit. Prudent credit and collection management can play an important role in contributing to the success of the funeral home. 7
Intelligent Credit Management Develop sound and constructive ti credit policies i and practices consistent with the way you want to do business. Provide for prompt collection and adequate protection of your company s investment in accounts receivable. Ensure that all credit decisions and actions will contribute to increasing sales volume, customer stability and to the funeral homes profit. Having debt truly isn t a bad thing. It is part of doing business. 8
What is a Credit Policy A credit policy lays the foundation from which h plans are formulated and decisions are made to achieve the goals set by your organization s business plans and objections. Your funeral homes credit policy is intended to cover most of the credit decisions that need to be made by your company over an extended period of time. Your policy should include balances from payments from Trust Funds, Insurance, Pre-Need, etc. EQUALLY. A few questions can shape the framework of your credit policy. 9
Framing your credit policy Determine your mission statement as it pertains to credit. (How strict or lenient will you be when providing credit to customers.) Define your goals in terms of credit and receivables and management. (How much bad debt is OK, age of receivables, DSO (Days Sales Outstanding), deductions. Establish a sound write-off policy for 90-120 days and remove from the balance ledger. This is no longer an asset. Who has the responsibility for making the credit decisions at your funeral home(s) How are you evaluating whether you should provide credit. 10
Framing your credit policy How are you handling collections internally. What are your terms of sales and are they aligned with your business objectives. Credit policies vary from death care facility to death care facility. Large death care corporations already have internal credit and collection policies in place. You do not have to be a large funeral home corporation to obtain precredit resources. There are many economically priced tools available on the Internet that allow you to get what the larger companies are using. The level of risk a death care facility is willing to take when evaluating credit worthiness and the aggressiveness with which you pursue collections are dictated by your individual business objectives. 11
Develop an Action Plan Don t let it become uncollectable 12
Why you need to develop a Collection Plan A sale is not complete until the CASH is in the bank! Your business would be out of operating capital if it were not continuously replenished through collections of receivables. Your assets are unproductively tied up if you do not convert them to cash on a regular schedule. Uncollected receivables may restrict and interfere with your own ability to pay bills on time. 13
What to consider when establishing a collection process The four most important principles to follow Collect the money Maintain a systematic follow-up Speak with the customer about the past due amount Preserve your good name 14
Go collect the money The primary function of the person responsible for collecting your receivables is to collect the money as close to the selling terms as possible. You ve established a contract with your customer and they have an obligation to pay with the terms set forth. Your internal collector whether it s you or your staff needs to make sure the customers obligations are met. Gain a commitment date for payment, follow up accordingly. Your tone may be easy at first, but should be accelerated as much as necessary to prompt payment of the delinquent account In business sometimes you need to be firm 15
Create a systematic approach After the initial iti contact, t keep additional contact t time on a strict schedule. Document accurately. Did the customer promise a payment on a certain date and it was not met? Make note of it. Follow-up, follow-up, follow-up. Otherwise the collection effort may become ineffective. Systematic follow up indicates to your customer the importance attached to the delinquent dollar amount by the creditor. This creates a collection advantage. 16
Keep the line of communications open Once you get the debtor to talk about the situation, ti you are much closer to recovering payment. Invite the customer to communicate, whether its by mail, phone, email or in person. The object of the discussion is to get the customer s s explanation of why they are delinquent. There are plenty of reasons The insurance money has not come yet, the estate is in probate, the immediate family is fighting, etc. Don t shut the door on communication 17
Preserve your good name Although h a customer may currently have trouble meeting payments, it certainly does not preclude them or their family from becoming a good customer in the future. Preserve the customers good will and your good name while pressing for collection of what is owed. However, if a choice is to be made between collecting money and preserving good will (theirs), typically the emphasis should be placed on collecting the money. If a customer has no intention of paying a legitimate debt then are they worthy of future business? No 18
Your collections efforts should entail awareness Awareness of the economy How is the situation. Awareness of the industry Are changes happening. Awareness of your business and your customers Taking the first steps in collections is crucial What are your customers problems? Why are they slow payers (or no payers)? Do they just not want to pay at all? 19
So what s next? Regularly l review your outstanding t invoices. i How long should you wait after the initial due date of the invoice has been missed? Your basic policy should specify the timing of the 2 nd and subsequent follow up Make sure you have the resources available to handle the entire collection effort. Are your records accurate and available. It is extremely important to keep a clear record of accounts that remain open beyond the regular terms of sale. 20
The early stages of collections If your AR systems allows past due notices, now is the time to prepare them and send out. Gather copies of invoices and be prepared to telephone your customers explaining what is past due. Your communication to a customer should be different based on the amount due. You should allocate less resources n a $100 balance vs. a $3,500 balance. 21
Past Due Letters Form letters provide substantial savings in time and expense. Sometimes they work, sometimes they do not. Often recipients recognize it as nothing more than a computer generated letter and discard it. Wit Write it correctly Explain what is due. Explain to them your position Follow up 22
Direct Telephone Contact The preferred method of contact where sizable amounts are owed. Handled properly it establishes a better understanding of the seriousness of the situation. Accelerates the collection of delinquent receivables. Build good will. 23
The middle stage of collections Customers are not responding to early collection efforts. Why? Was there a problem with service? They choose to pay others ahead of you. They do not have the money. This stage is a challenge to your internal collector s ability. Separate who is going to pay vs. the ones that will not. Follow up intervals must be maintained regularly. Usually once a week. The collector s abilities must be applied in writing resourceful, appealing and tactful letters that induce the customer to fulfill their financial obligations. You ve seen the RED flags now sell them. There is still good will in this stage; communications is key. 24
The middle stage of collections Promises, promises of payment. During the mid-stage it is quite common for customers to promise payment, give excuses for non-payment, or even send partial payments. If partial payment is made, this provides the collector something to work on. Use common sense and better business judgment. Set up specific dates and amounts that you want the customer to pay to complete the debt at the earliest date. 25
Final Collection Stage You ve nearly exhausted all avenues to collect on your own. The final collection effort by your funeral home is designed to motivate the seriously past-due customer to pay their account and avoid the cost of third-party action. At this stage you are probably at the 90 day past due mark. Your final letters and calls will be to offer a last chance opportunity to make payment arrangements or payment in full. 26
Final Collection Stage Point out that alternate implications will be costly if a third party collection agency is utilized to collect the debt. The agency will report the debt to the credit reporting agency, which in turn may affect their credit for 7 years. Point out that Interest is accumulating on their balance and the collection agency will add it to the principal. p Tell them legal action is also viable. Your goal at this point is to get them to pay something now. If the customer is still unresponsive and providing excuses, it is time to refer the account to a third party collection agency. 27
Yes, the account is still collectable When all internal collection efforts have been exhausted, it is time to refer the customer account to an outside collection resource. Selecting the right agency should be done with care. You should thoroughly understand who the agency is. What are their qualifications? Your agency should be licensed to collect debt in your State, bonded, and insured. Do they specialize in your field or market? What is their industry reputation? Ask for industry references. Do they have the resources to collect your money? What type of fee structure do they utilize? *Contingent *Flat Fee *Other 28
Trust the agency Provide them with what they need 29
Your collection agency needs your data Provide a copy of the obituary, contract, and breakdown of charges. By having the right data available to the collector handling your account, the harder it is for the debtor to dispute the amount owed. Debtors typically dispute how much they owe, not that they owe the debt. The more information you provide to your agency the more they can collect for you. 30
When the account reaches collections It is essential that you send new responsible party contact information you discover to your agency. New telephone numbers or addresses are key to finding the debtor. If the debtor has moved, people in your area may know where he/she has relocated. Share this information with the collection agency. 31
With collections Time truly is money Turn your accounts over in a timely fashion. 90-120 days The longer the time from the date of last payment or service to the time you place your account for collections, the harder it is to collect.* The age of the account is crucial. The older the account is the greater the number of disputes that may arise. * ACA International When a loan is 90 days overdue, a 75 percent chance of collecting exists, but the odds fall.5 percent with each passing day. By the time a loan is 180 days or six months past due, the chance for recovery has dropped to 30 percent. After a year, it is less than 10 percent. 32
Why speed is essential Respond quickly to your collection agencies request, including additional documentation, payment plans options, and settlement in full requests. If you receive a direct payment, report it to the agency immediately. Your agency must convey a sense of urgency to the debtor. If the needed information is not returned quickly, the agency may lose momentum. The debtor could change their mind and the agency may never reach them again. 33
Should you take a settlement? It depends. You need to weigh the options between what your agency recommends vs. the Legal Option, which may have associated upfront costs; additionally the length of time could be a factor. Accept deeper settlements on accounts with BAD credit and on accounts in non-garnishee states. Your collection agency should have the most recent credit information on the responsible party to make an educated decision on your behalf. 34
Staying out of the negotiation process Do not become involved in negotiation or set up payment plans with the responsible party once an account is in collections. Your collectors are experienced professionals who know what the best approach is to handle the negotiation process on your behalf. If debtors are contacting you, simply refer them back to the agency who has the most information on the debtors ability to make payment. Unfortunately, debtors will play both the funeral home and collection agency against each other and pressure you to accept payment. 35
The debtor is playing the Agency against You What the agency saying to them What they are tell you We can offer you a payment plan of $1000 monthly for three months The collection agency wants me to pay an outrageous monthly plan, please, please I can pay you $300 per month. We obtain a settlement in full for Call and get you to OK 70% 85% of total due. settlement in full with a payment plan. The agency has leverage and knows the debtors credit history. The debtor is embarrassed that they actually owe the money Complain the collector was abusive and damaged my reputation. I would rather deal with you. Please work with me. 36
Sometimes filing a law suit may be necessary When your agency recommends suit, you should thoroughly hl review your options with the agency to determine if it is in your best interest. If you decide to move forward, most agencies will have a network of collection attorneys ready to take action. The account is still collectable. 37
Summary Few businesses can be successful if they are not paid for the goods or services they deliver on credit. Prudent credit and collection management can play an important role in contributing to the success of the funeral home. By establishing a good credit and collection policy internally you have a much better chance of collecting your customer s s past due balance. Although compassion is a big part of your business you should still consider it a business. 38
Questions?