Having been a CFO for more years than I can count, one of the most critical things I learned was the value of having a well-oiled collection machine. Not the “boiler-room” heavy-handed collection callers badgering my important clients, but instead a tight process on sending out invoices, following up with Dunning letters, and having professionals working to collect overdue invoices promptly (as I found, after 60 days, memories fade, and unpaid invoices seem to get lost or forgotten).
Back before the recession in 2001, I remember talking with Mike DuPont, Partner at Wagner, Falconer and Judd about my accounts receivable. I had millions in AR, which I thought was great. The bank was giving us credit, and we were paying 7-8% interest to borrow from our line of credit. Mike gave me a nudge to print out an aging report to see how old some of the AR was, and to my surprise, there were invoices 90, 120 and 180 days old, from big companies with ample money to pay. Why was I paying interest to borrow money when I was owed millions from clients that we had delivered products and services to – in effect floating these large companies, saving them the 7-8% to borrow money!
My hesitation, as most CFO’s and owners have, was that I didn’t want to have my lawyer contact the client (especially on-going clients) and threaten to sue, nor did I want to pay 1/3 (33%) of the invoice to our lawyers to collect! But Mike is a forward thinker and explained options to me, none of which constituted a 33% contingent fee. Depending on scale, his firm charged a much lower fee, and offered different options. A flat fee per month, an hourly fee or a contingent fee (typically less than 20%).
What Mike’s firm also provided was a model whereby he provided professionals that would work seamlessly with our internal staff, and present themselves with professionalism with our clients, as he knew most of our clients would stay clients, that good collection practices shouldn’t lead to litigation and the risk of loss of a potentially great client.
So we instituted Mike’s firms processes, submitting 90 day old invoices on day 91 to Mike’s firm. We did stay with a contingent fee model (again lower than 20%), though in retrospect a flat fee per month with a small “kicker” or bonus to motivate and align the firm with ours may have been a better long term model.
But for great advice from Mike at Wagner, and a firm collection process, workout with the bank in 2001 would have been the path forward. Instead, the bank gave us one chance to pull out of our illiquidity, collect for work we had done, and move forward. It worked, and despite the very tough recovery for the rest of 2001, we survived and later thrived.
Interest rates have stayed at historically (at artificially) low levels since the Great Recession of 2008. They had to for purposes of a long difficult recovery. The Fed has signaled they will ease into raising interest rates. Don’t wait for rates to go higher to institute a good collection process!