In truth we don’t want to compare bad debt collection to accounts receivable management. We turn to bad debt collection when accounts receivable management fails. Done properly accounts receivable management will reduce the need for bad debt collection. One aspect of doing accounts receivable management properly is recognizing when it has, in fact, failed.
The question then becomes how do we know that it has failed? How old is too old? Some collection agencies would have you believe you should turn over any account over 90 days. While this might work for large businesses it won’t work for the average small business. The answer lies in the accounts receivable management system you’ve designed (you do have an accounts receivable management system designed, right?) and the parameters you’ve established for identifying bad debt and what you know about the individual customer. In other words, inflexible policies that don’t take individual customers into account don’t work and deciding on the fly each time doesn’t work either, you need something in between.
You need an accounts receivable management system. You need established credit policies. You need to decide in advance how old is too old, set up a set of general guidelines for deciding when to turn an account over to a collection agency, then review any account that exceeds those terms or falls outside those guidelines. Then make a decision. The biggest mistake we see small business owners make is waiting to long to make decisions about bad accounts and take action. Refusal to look, failure to establish guidelines and stick to them, and avoiding making decisions will all lead to increased bad debt losses.
In the meantime, watch out for refusal to take calls, broken promises, unreasonable anger when you ask to be paid and multiple excuses or reasons for not paying. These are all signals that you’re likely approaching the need for collection agency services.