Accounting Best Practices, Fifth Edition

7–8. Outsource Collections

Some companies have a very difficult time creating an effective collections department. Perhaps the management of the function is poor, or the staff is not well trained, or it does not have sufficient sway over other departments, such as sales, to garner support in changing underlying systems in a way that will reduce the amount of accounts receivable to collect. Whatever the reason or combination of reasons may be, there are times when the function simply does not work. A variation on this situation is when a collections staff is so overwhelmed with work that it cannot pay a sufficient amount of attention to the most difficult collection items. This is a much more common problem. In either case, the solution may be to go outside the company for help.

One solution is to outsource the entire function or some portion of it. When doing so, a company sends its accounts receivable aging report to a collections agency, which contacts all customers with overdue invoices that have reached a prespecified age—perhaps 60 days old, or whatever the agreement with the supplier may specify. The supplier is then responsible for bringing in the funds. In exchange, the collections agency either requires a percentage of each collected invoice (typically one-third) as payment for its services or it charges an hourly rate for its efforts. It is almost always less expensive to pay an hourly fee for collection services, rather than a percentage of the amounts collected, though ...