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Start collections early Featured

9:43am EDT July 22, 2002
Buckeye Check Cashing Inc., d.b.a. Check$mart, is writing off a $40,000 debt from a now out-of-business construction company that recently processed a few checks through the Dublin-based business.

That’s a rare mistake for Check$mart these days, since president James Frauenberg implemented a strict check approval and collections process after he and partner Michael Lenhart purchased the faltering business in 1991. From four stores and 18 employees, Check$mart has grown to 60 locations with 300 employees in Ohio, Indiana, Kentucky and Florida.

Basic retail sense is what has made this business grow, he said, although he would not reveal revenue figures for his privately held company. Not all items cashed are personal, payroll or other third-party checks; for example, the business will also cash insurance vouchers.

Convenience is the number one reason people pay a few dollars to cash a check at Check$mart. Sixty-seven percent of its customers have bank accounts, they just don’t like bankers’ hours, Frauenberg says.

Check$mart charges customers from 2 to 10 percent of the amount being cashed.

“Different companies do it different ways,” Frauenberg says. “The highest instance of bounced checks is for personal checks. We assign a percentage to the risk we take. For the vast majority of all checks we cash, it’s something less than 3 percent,” he says, declining to discuss specific numbers.

Problem identified

Before acquiring the floundering business, Frauenberg reviewed the accounting books and immediately identified the problem.

“We looked at the cash flow, not just the profit and loss statement, to see if the cash flow was insufficient to cover expenses,” he says. “There’s a couple of things to look at. One is, how do you increase cash flow, and the other, obviously, is how do you decrease expenses.

“When we looked at cash flow, we realized that an immediate impact could be had on collections. That’s how we decided we better take care of that area first. We had somewhat of a bad debt situation in the 20 percentile range, and now it’s less than 10 percent” that the company eventually has to write off.

Frauenberg identified the bad debt situation in the first day of due diligence, he says.

“It was just so obvious. It was a significant number. It was, next to payroll, the next largest number. It was that obvious.”

While he does not recall the amount of debt Check$mart carried when he acquired it, Frauenberg does remember that collections was being done in a haphazard manner.

Collections improved

“We started the turnaround within the first five or six months,” he says. “We really had completed a nice part of the turnaround after the first year. We were profitable after the first year and collections was part of it. The other part was getting back to basic customer service disciplines.

“Not everybody who comes in brings bad checks. You have to create an atmosphere where people are comfortable coming in.”

Frauenberg has been in retail ever since he got out of college, and “we looked at this check cashing business as another retail business. There are certain things you need to do in any retail atmosphere to make the experience go well with the customer and the company.” For example, employees with bad attitudes who don’t respect the customer are replaced, he says.

What did Check$mart do to improve collections?

“First, we retrained our store staff and got them back to the normal standards of what they should be doing to check the item on the front end,” he says.

Employees must verify the address, phone numbers and employment, which could mean calling the employer and asking for a physical description if there is no photo ID, Frauenberg says.

“The other thing we did was more significant,” he adds. “We had a fellow in our employ who was a professional collector in another one of our businesses. We brought him over to Check$mart and centralized our collections so we could get our arms around the problem.

“We got a proper letter writing campaign going to notify people that their check bounced.”

A systematic series of collection letters is accompanied by phone contact with the customer. Send the first notification letter the same day the NSF (nonsufficient fund) notice comes back to the company, Frauenberg says.

“Some people send six or seven letters. We only send three,” he says. “We believe phone contact is better. If our people, when the customer cashes a check, do their job properly, we have a home phone and a work phone for the customer.

“Have your process down to when that item comes back to you, your people know what to do,” he continues. “Confirm with the customer that the check bounced. About Day 3 and 4, we’ll start to call. With a lot of people, after you make the first phone call, that may be the first time they realized the check came back. The letter and call also establish with the customer that this is important enough for me to call. You have to set that up in the customer’s mind that this is an important item.”

For example, if the person doesn’t pay and the debt is $10,000, he says, the company might do an asset survey and try to get those assets attached.

“In any good collection situation, you have to weigh your end result against what you are willing to put into it,” Frauenberg says. “If a person owes $100 and they are out of work and living with a relative, it doesn’t make sense to pursue that person, because he doesn’t have any means to pay. Then you go on to the next one.”

Because of its collection system, Check$mart gets more than 50 percent of returned items paid within the first two weeks, he says.

“For the next two weeks, it’s about 15 percent. In the second month, it’s down to about 10 percent. After that, it starts trailing off.

“If you don’t hit early to establish with the customer that they owe you the money, the chances of success on that collection deteriorate pretty fast.”

Andria Segedy (aesegedy@sprintmail.com) is a free-lance writer for SBN.