All businesses should have a procedure in place to regularly monitor receivables so that potential problems are spotted quickly and acted upon efficiently. An effective collection program should contain:
* A written program
* A person responsible for implementing the program
* Careful note-taking with regard to all collection efforts
* The ability to track and follow up all activity
* Follow-through on stated courses of action
* Maintained control of the collection process
Not every account that is delinquent will ultimately become a bad debt. Unless you have information to indicate that an account is going to be a serious problem, there are general guidelines -- the "MAGIC" formula -- to follow.
* Memo. Send reminder memos when the account first becomes delinquent.
* Attention. Send more specific letters as the account becomes 30 to 60 days past due.
* Gradient. Increase the number of telephone calls and personalized letters as the account becomes further past due.
* Insistent. Issue ultimate demand for payment with professional collection or legal activity to follow.
* Coercive. Professional collection activity or legal action implemented.
Written correspondence to a debtor should be short, simple and direct, written in a positive manner, identifying the problem and directing the debtor to take a specific action. Letters that are unnecessarily harsh or negative could exacerbate the problem. Be careful what you state since you never know who will read it, and it could be used against you.
If the debtor agrees to make payments as a result of your written contact, you should still follow certain procedures to ensure protection for continued transactions. Periodically make copies of checks received from customers or at least note the bank information on your records. Know whether the debtor is making payments over a period of time with checks drawn on the same bank account or whether he or she is writing checks on different banks.
An established collection program implemented by someone using the right tools can keep your money where it should be -- in your pocket, not the debtor's. If your efforts fail, referring the account to a collection professional is not a defeat but simply part of your plan to maximize recoveries. James P. Valecko is the partner who manages the Pittsburgh office of Weltman, Weinberg & Reis Co., L.P.A., a national collections/creditors' rights law firm. He can be reached at (412) 434-7958.