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 Companies are in the business of making their shareholders money. And to ensure their shareholders are getting what they deserve, companies need to carefully monitor and control the debt of their customers.
In this article we're going to cover the fundamental rules that many companies utilize to control how much money is owed to them by their customers. That explanation will include a brief overview of a typical dunning process as well as a discussion of why companies are concerned about both non-payers and late payers. If you've been having trouble with debt lately, then reading this article will help you to better understand what could happen as your creditor starts their debt collection process.
Getting Customers to Pay their Bills
One of the biggest challenges most companies face is getting customers to pay for the goods and services received. More importantly, companies not only want to get paid, but they want to get paid in a timely fashion.
Whenever services or products are received and payment is not made immediately then the company has extended credit to the consumer. In doing so, the company assumes a risk of non-payment. Generally companies extending credit to customers are concerned with:
- Non Payment - anytime payment in-full is not received there is a significant chance that the consumer may never pay back all of the money owed. This creates a risk of non-payment.
- Late Payments - when consumers do not pay back their debt in a timely manner, a company incurs a cost which is related to their cost of borrowing money from their creditors.
Companies are concerned about both non-payment and late payments because these patterns can create cash flow problems. For example, the company might be paying for raw materials to manufacture its products, or paying its employees to provide services, it subsequently sells to its consumers. If the consumer is late making payment, then the company will have a larger than desired time lag between their expenses to make the product and the revenues received for the product.
DSO and Aged Receivables
Days Sales Outstanding, or DSO, is just one of several measures that companies use to track this delay in receiving payment. DSO measures the average number of days that a company takes to collect revenue after a sale has been booked.
Another measure of the timeliness of payment is aged receivables. This measure is used to track the aging of a company's accounts receivables. Aged receivables is typically stated in terms of dollars owed that are 30, 60 or 90+ days past due. Money that is past due in each of these timeframes is reported to senior executives usually in terms of the percentage of total receivables that is in each of the aging brackets.
Revenue Protection
To monitor these payment patterns, companies often establish revenue protection groups. These groups are typically responsible for both the measurement and the collection of monies owed. This group is also responsible for constantly monitoring the creditworthiness of their customers.
Deposits
When issuing credit to a new customer, the company might first run a credit check using a credit rating agency to see if the customer meets pre-established creditworthiness thresholds. This process is the revenue protection group's first line of defense against non-payment of monies owed. If a new customer does not pass a certain credit threshold, or their credit history is insufficient to receive a credit score, then the company will ask the customer for a deposit before activating an account.
Deposits can be a temporary or permanent arrangement. Typically, deposits are returned to customers after an acceptable payment pattern is established. Most times, deposits are returned to customers with interest.
Late Payment Charges
If payment is not received by its due date many companies charge what is known as a late fee or past due fee. This charge is meant to encourage customers to pay their bills on time. The exact policies on charging a late fee will vary from company to company.
Oftentimes regulating bodies establish standards or guidelines which companies can follow when creating their late payment policy. The policy fees are normally related to the company's cost of recovering money and / or its cost of money.
Late payment fees are usually due after a certain timeframe has passed and full payment has not yet been received. For example, the creditor might charge a fee that is 5% of any amount unpaid 30 days after the invoice is sent to the customer. Late fees charged for businesses are usually higher than those charged to consumers.
Sometimes consumers can only afford, or only wish, to send in a partial payment. Anytime payment in-full is not received, the unpaid balance may be subject to a late payment fee as just discussed.
Dunning and Collections
If payment patterns indicate a customer's debt might not be repaid, the company will institute its dunning process. Dunning is the name given to the process of methodically communicating with customers in the hope of collecting monies owed. These communications usually start with gentle reminders in case a customer inadvertently forgot to send in a payment.
Steps in a typical dunning process might include:
- A gentle reminder in next invoice or a dedicated letter to the customer indicating that payment was not received.
- An outbound call to the consumer reminding them that payment has not yet been received.
- A warning letter sent to the consumer stating that if payment is not received in a certain timeframe that the company will take steps to discontinue service (such as in the case of utilities) or the account will be sent to a debt collections agency.
- Discontinuance of service and / or selling of the receivable to a debt collection agency.
Prohibited Debt Collection Practices
There are certain debt collections practices that are not allowed under the Fair Debt Collections Practices Act. The most commonly reported illegal debt collection practices include:
- Demanding larger payments than permitted
- Harassing the debtor or others
- Threatening dire consequences if payment is not received
- Impermissible calls to the consumer's place of employment
- Revealing debt to third parties
- Failing to send required notices
- Continuing to contact the consumer after receiving a cease communications letter
- Failing to verify disputed debt
We talk about this particular topic in more detail in our article on Debt Collection Practices.
Finally, if you believe that you've been a victim of illegal debt collection practices, you can report that collector to your state Attorney General's office and / or the Federal Trade Commission. You can also telephone the Federal Trade Commission using their toll free number 1-877-FTC-HELP (1-877-382-4357).
About the Author - Controlling Consumer Debt
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