Accounts receivable are short term assets that consist of an amount/amounts owed by debtors. They are reflected in the balance sheet as assets. They refer to any money owed to the business by its customers (Salek, 2005). Accounts receivable are employed by the accounting department in order to record billing of goods and services ordered on credit. In many firms accounts receivable are executed by generating an invoice and either mailing it manually or through electronic delivery. This process is usually called credit terms of payment. The department that deals with such accounts in an organisation is the sales one; therefore, they are all recorder in the sales ledger. The following details accompany a given entry of accounts receivable: the sales a business has made, the value of goods or services, and the amount of money owed. There are different methods available for measuring the net worth of accounts receivable.
Managing and collecting receivables is an important aspect for the growth of any business. In order to have a successful debt collecting system, there must be a good relationship between the debtor and the creditor or debt collecting agencies. However, attaining an optimal debt collecting practice faces several challenges that may pose legal or ethical risks. The obstacles that are usually encountered when collecting receivables are denial or refusal to pay, the economy and poor budget management. The paper will analyze debt collection process, its main obstacles and the way these challenges can be handled to ensure that the relationship between the creditor and the debtor is enhanced without affecting the performance of the business.
One of the most challenging issues when running a business is learning and understanding the reality of dealing with debtors or dealing with accounts receivable (Schaeffer, 2002). In most cases, a business must run on credit, as not all customers pay in cash, either due to economic condition or the purchasing system. Furthermore, the billing process of the debtors may not allow cash purchases; hence, making credit transactions inevitable.
The common stages involved in collecting debts
Receivables, just like other types of debts, have several stages. However, a debtor may clear his or her arrears in one of the stages. The main stages are arrears/falling behind stage, default notice, letter of demand, legal action, court and enforcement stage.
This is the period that a debtor is granted in order to prepare and clear his or her debts. In most cases, creditors give 60-90 days period, in which a specified debt is required to be paid. During this period the debtor may receive a reminder requiring him or her to pay the debt. Although missing this stage is not considered to be an offence, it may strain the relationship between the creditor and debtors (Schaeffer, 2002). In some cases it may lower the credit worth of the debtor.
According to the credit code of the federal state government, the creditor is required to notify the debtor about his or her debt and the period, in which he or she needs to repay it. In most cases a debtor may be notified about the lapse of the debt fall back period and may be requested to clear the debts promptly.
Letter of demand stage
After the expiry of the default stage, a creditor may be sent a latter of demand that requires him or her to pay a specified debt within a given period of time. Mostly, the creditors demand full payment of the amount owed. Although the letters are not offered by the courts, the federal codes of paying debts require them to be addressed promptly (Bragg, 2006). At this stage, the creditor may report the default to credit reporting agency.
Failure to respond to the letter of demand culminates into legal actions against the debtor. The debtor, who defaults to pay his credit, may be issued with a statement of claim. The statements of claim are provided by the local courts and require one to provide a response within 28 days. The main response options to the statement of claim are declining to clear the debt and defend it, ignoring the statement of claim, accepting one part of the debt and declining the other and defending the actions, or file voluntary bankruptcy or debt agreement (Bragg, 2006).
In this stage the court may give its verdict. If the court rules in favor of the creditor and the debtor rejects that verdict, the court may award its judgment to the creditor. The award may also include the cost incurred by the creditor and any interest earned from the period that the debtor had defaulted on his payment.
There are four main options at the disposal of the creditor when implementing the judgment. The creditor will pursue the option that will enable him or her to return the largest portion of the debt. The common options are bankruptcy, Garnishee, examination notice and writ of levy of property.
When handling debts, it is imperative to consider the fact that in order to collect the debts well, the essential values are professionalism, persistence and persuasiveness.
Statutes that guide the collection of receivables
The most prominent act employed during debt collecting process is The Fair Debt Collection Practices Act (FDCPA) (Schaeffer, 2002). It was established in 1978 as a part of the Consumer Credit Protection Act. Its main goal is to abolish any abusive practices or laws in debt collecting system. In addition, it enhances a fair process of collecting debt and provides a platform, on which validating or disputing of debts can be conducted. The act offers guidelines under which debt collectors may handle the receivables, and defines the rights of both the creditors and the debtors when receivables are collected.
The National Consumer Protection Agency and The Federal Trade Commission (FTC) are responsible for enforcing the FDCPA. They guide the process of debt collection and prevent debt collectors from using deceptive, unfair and abusive practice against the debtors (Zahid, 2010). Under The Fair Debt Collection Practices Act, a debt collector is someone, who is contracted by organizations or individuals to collect debts on their behalf. Debt collectors include attorneys, collection agencies, and organizations that purchase delinquent debts and then take the initiative of collecting them from debtors. The debt collecting agency covers household, family and personal debts including money owed in credit cards, mortgage and medical bills. However, FDCPA does not cover liabilities or debts that have been incurred when running an organization.
Challenges in debt collection
The current economy is facing many challenges that are affecting the ability of the debtors to clear their debts. The financial crisis has had a profound impact on the economy forcing many people out of employment and businesses going bankrupt (Bragg, 2006). The economic recession, which is referred to as the great recession, was the aftermath of the mismanagement of the global economic system, and opaque and uncontrolled credit-giving practices offered by various financial institutions. There was a credit boom, as people took loans to buy mortgages, but were unable to repay them. Many organizations went bankrupt due to the unpaid loans, which clearly show that uncontrolled lending may lead to bankruptcy. In order to save costs many organizations retrenched people; thus, affecting their purchasing power. The economic problem, as a challenge in paying debt, emanates from the effects of the great recession on the organizations in particular and people in general.
Currently, people are in the genuine hardship, because the economy is under strain to create more jobs and cater for the large budgetary deficit experienced at the moment. The buying power of individuals has reduced, forcing many consumers and businesses to engage in credit transactions. Some businesses go bankrupt or are on the verge of collapse making it difficult for them to pay debts. In fact, the bad debts of many companies have been growing at an alarming rate; thus, affecting their cash flows. According to the Federal Reserve’s quarterly report on the household credit and debt released in 2012, there are two basic trends in relation to debt repayment. The delinquency rates are stabling, even though the net amount of consumer debt is decreasing. Another trend is that the number of people who are subjected to debt collections by debt collectors has been on the rising trend, from a paltry 7% to over 14% in 2010. In 2010, one of every fourteen consumers faced the actions of debt collectors.
The effects of economy on the ability to pay debts are essential when constructing the system of collecting debts. Creditors need to take into account the fact that the economy is experiencing extensive strain, and individuals and companies are experiencing cash flows problems; thus, making it difficult to clear debts in advance. With the difficulty in acquiring enough cash to make purchases, credit purchase has become a popular option. At the same time there is the credit risk regarding repaying the debt within a given period of time. Considering the effects of the economy, the debt repaying system should be less costly in order to ensure that it does not pose further financial stain to those, who wish to repay their debts; it should be flexible and easy to use in order to prevent debtors from using the complexity of the system as an excuse of not paying promptly, and adjusting fall back time to give the debtors sufficient time to pay up the debts.
In most cases, debt is usually dominated by a specific currency and so, any monetary changes on the currency affect the overall amount of the debt. The effective size of a specified debt is affected by deflation or inflation. As such, it is essential for the creditor and the debtor to dialogue and attain a fair consensus on how to implement the standard of a deferred system. When the economy is taken into account, there is a big relationship between deflation, debt, deflation, money supply and inflation. So any changes in economic growth present a major challenge to the ability of a debtor to clear his or her debts.
The economy may also pose a big challenge to the working relationship between an organization and its debt collectors. Debt collectors collect some fee, and in some cases their demands may exceed the reasonable amount of money that an organization can provide. With the hard economic times, low business turnover and some organizations going bankrupt, it may be difficult to cater for the high fees that debt collectors may require. Furthermore, the tactics employed by the debt collectors may be costly to the debtors who have financial problems (Hillstrom & Collier, 2002).
Poor budget planning
There is a direct relationship between poor budget management and the process of collecting receivables. In some cases, bad debts are usually caused by poor budgetary management and planning.
It is usually advisable for businesses to strive to be free from any debt. When there is a poor cash flow and the liabilities are greater than assets, then it means that the budget was poorly planned and did not consider the provisions for the debt management. Bad debts are not economically or fiscally healthy, and should be a key target in deficit reduction. When planned borrowing is utilized, the interest expense in the budget will be minimized.
When planning or designing a budget, it is imperative to note all the received income. It includes investment income, employment income, support payment and debt income. Good management of budgets ensures that debts are kept low; hence, minimizing the expenses and time utilized when collecting debts (Hillstrom & Collier, 2002).
Good management of budgets calls for opening of all bills once they are received, and scheduling each for prompt payment. The challenge of poor budget management involves failure to contact the debtors once a budget is designed in order to schedule payment based on their income or forecast of their future earnings. In addition, it is difficult to create repayment timetables if the budget is poorly planned; hence, making it hard to include each debt in the budget. It is imperative to understand the importance of planning when collecting receivables; it is essential for managing debts and debtors. The main aim of budget management is to avoid wasteful lending and spending on the side of the debtor (Bragg, 2006).
Poor budget planning, as a challenge to debts collection, emanates from the fact that inappropriate or outdated accounting practices may be used to develop budgets. In this case the management may fail to factor in the role of credit management in handling receivable. Furthermore, negligence when developing marketing and financial policies may affect the efficiency of collecting debts.
Refusal to pay
This is a major risk in the process of collecting debts. A debtor may fail to pay his or her debts due to a number of reasons. One of the reasons why the debtors may not pay their arrears is lack of funds. The economy may affect the financial stand of a specified debtor, making it inevitable for him or her to refuse to clear the debts (Jessee et al., 2000). When developing a cordial business relationship, it is imperative for any business organization to conduct a thorough research on the potential customer in order to minimize the risk of default. If the client cannot meet his or her obligation of paying debts, it is important to set up a reasonable payment plan. In this way a debtor may be paying a small quantity of the amount owed until he or she clears the debt.
A debt may remain outstanding because the client is not happy or satisfied with a specified services or products offered. If the issue is unsettled, the receivable account may go unpaid and further action may result in ethical implications, such as damaging the reputation of the organization or a legal standoff. It is important for both the creditor and the debtor to engage in appropriate dialogue and seek corrective measures to avoid inappropriate disputes (Bragg, 2006).
Sometimes and out of defiance, a debtor may decline to pay his debts. The debtor may be happy with the goods or service but he or she may not want to pay the debt even if there is money to settle the arrear.
Another factor why a client may deny paying arrears is due to the fact that he or she did not receive an invoice. Businesses fail to invoice properly or fail to send invoices within the required period; thus, opening loopholes for technicalities during legal interventions.
Addressing the problem
The main issue discussed in this paper is how debt collection process can be handled without straining the relationship between the creditor and the debtor. In addition, debt collecting process should not be expensive to bring additional costs to both the debtors and the creditors. Basically, the longer the receivables remain unsettled, the more difficult it becomes to settle the debt. Although some receivables take long to collect, it is imperative for the debts to be paid promptly in order to avoid raising cash flow problems in an organization. In order to address the problems of collecting receivables, there should be appropriate debt collecting strategies that need to be employed. These strategies should have legal considerations, should be economical, should be easy to implement and must be acceptable by both the debt collector and the debtor (Bragg, 2006).
There are several ways, in which debt collection may be conducted, without affecting the positive relationship between the debtor and the creditor. These may take online or offline perspectives. However, in order to ensure that there is a positive modality of collecting debts, both methods should be economical, user friendly, acceptable, time-saving, and legal.
The techniques of collecting debts are essential for any business. However, most of the businesses have due accounts receivable that have been written off, as they cannot be collected, no matter which type of data collection technique an organization might be having at its disposal. Recession, changing trends in the economy, and bankruptcy might be some of the reasons. Each debt collecting organization has a responsibility and duty on the type of methodology to employ. Good debt collecting techniques ensure a good cash flow; hence, a positive performance of the business (Jessee et al., 2000).
Offline debt collecting techniques
Offline debt collecting techniques involve collecting receivable either through the phone or physically by seeking the debtors and asking them to remit their arrears (Jessee et al., 2000). Making collection in people’s residential areas may be time consuming, and in most cases it is not effective. However, calling people or businesses directly can be effective if an invoice follows the contact. Most of private individuals and small companies do not approve collection through the phone calls and would like the debt collectors to present themselves physically in case there is need for communication and dialogue. If the organization’s debt collection modalities are not effective, it would be imperative to consider the services of debt collection agency or companies. However, regular agency fees may be relatively high and a deposit of a specified amount may be required prior to the commencement of any debt collection (Jessee et al., 2000). Furthermore, all the collected debts are sent to the agency and so, the collection costs may reduce the overall value of the receivables.
Another modality, through which the debt collecting agencies deal with their clients, is through purchasing of due accounts receivable or debts. Depending on the type of account receivable, age, and amount, an organization or individual may be able to collect almost 50% of its debts. As such, an organization may opt to contract many debt collecting agencies; thus, developing a wide base, on which it can sell most of its due receivables. Currently, debt collection agencies are considered as one of the most effective modes of collecting debts (Salek, 2005). Their effectiveness is also enhanced by the fact that they can manage to contract a pool of relevant professionals, who have the ability of managing debtors and handling debt accounts. In addition, they may have experience in the credit collection market and so, they may understand different categories of debtors and deal with them accordingly.
Online debt collection techniques
Online debt collection techniques refer to techniques and strategies that creditors and debt collecting agencies utilize in order to locate and collect debts from debtors through the internet. By using networking sites, such as twitter and Facebook, it is easy to find a debtor, get employment information or mailing information that is of a great assistance when enforcing collection efforts. By using database technology, it is easier to maintain the database of customers that have been offered goods or services on credit (Zetocha et al., 1984).
E-commerce online payments have become very popular in the contemporary world. Methods such as PayPal, skrill, ACH provide an avenue, through which quick and economical debt recovery may occur.
A large number of creditors are not aware that they can collect debt without the input of the debt collecting agencies. However, some creditors will look for ways of avoiding to pay their credit no matter which technique is employed in collecting debts.
It is important to appreciate the fact that the debtors are familiar with the debt collecting processes, laws related to debt collection, and the ways creditors collect debts (Hillstrom & Collier, 2002). With this in mind, it can be recommended that a creditor should develop a coherent and strong credit policy in advance. Furthermore, the creditors should ensure that the credit application processes are scrutinized and up-to-date with the current trends in credit management. It should be noted that uncooperative creditors react aggressively when asked in advance to complete a credit application. As such, a creditor should analyze and be sensitive to a potential debtor’s reaction in order to detect any warning signs of default. When the initial application process of a debtor is completed, and the creditor finds him/her with a delinquent account, he or she should look for ways of collecting the debts without destroying the relationship with the customer by considering the challenges of collecting receivables. The overall aim is to collect receivables, given the fact that collecting debts needs persistence, firmness and perseverance.
The communication between the creditor and the debtor is essential in ensuring that the process of collecting debts is smooth and successful (Louisiana, 1994). In this case, the process should be direct, persuasive and detailed. Basing on FDCPA, appropriate debt collecting techniques should be employed. The employed techniques should take into account the challenges involved in debt collection. These challenges are poor budget management, the economy, and intentional refusal to pay the debt. The most appropriate technique that I can recommend, when collecting debt, is online debt collection and the use of agency to purchase delinquent receivables.
Recommendation of online debt collection strategy
Online debt collection refers to methodology employed when collecting debts through the internet. In this information age and with the revolution of internet, payment has been made easier and faster; the records can be kept for a long time. E-commerce online payments have become common and have provided economical and quick tools to pay debts. Examples of online payment are ACH, PayPal, skrill, and online credit card payment options (National Automated Clearing House Association & Council for Electronic Billing and Payment, 2004). By the use of the network sites it is easier to trace the employment and residential data of the debtor and so, it will be easy to make home visits to demand the clearing of outstanding debts. This method is cheap, as it requires less paperwork, and is economical because it assists the creditor to save a lot of money that is usually wasted when conducting physical search. Although secretive, it is a reasonable way of getting information from the debtor without coercion. The use of database technology is important because it is easier to maintain information about goods or services that a customer has purchased from a specified creditor. This is important because it prevents unexpected disputes that may ultimately result in the customer’s denial or refusal to pay for the goods. In addition, it may offer evidence in the court in case the customer’s disputes are given transaction.
The use of collection agencies
Collection agencies assist a given creditor to collect debts that are overdue. They are third parties and so, they may act as a buffer between the creditor and the debtor in terms of a good business relationship (Hillstrom & Collier, 2002). As agencies for collecting debts, they must adhere to the law that protects consumers and debtors in general. As such, it will be detrimental for them to violate the FDCPA. Some agencies operate by buying the delinquent accounts and following up the debtors. The agency may opt to sue the debtor and cover its costs, but when the date is recovered they cover the expenses of purchasing the delinquent receivables. The use of agencies is essential when handling challenges involving refusal or denial by the customer to pay.
In my opinion, the best to use method of debt collection is the online payment method in. The world is becoming digital and with the revolution of internet it will be essential for all organizations to adopt the online methods of collecting debts. In addition, it takes into account all challenges involved in debt collection because it is economical, fast, and generally acceptable.
In five years the challenges involved when collecting receivables will have been minimized, because cheap modalities, such as online payment methods, will be common. In addition, debt collecting agencies, which are becoming common, will have developed strategies that are essential with dealing with debtors who refuse to clear their arrears. There are high prospect that the current global economy will recover completely and so, the debtors will be more willing to clear the accounts payable.
In conclusion, debtors just like customers should be treated well. For any business to succeed the debt collecting practices should be friendly to customer. In the current business environment, where most of the customers purchase on credit, good credit management strategies should be employed. The main challenges when collecting credits are poor economy, bad budgetary management and refusal to pay. In order to handle these challenges, the most appropriate debt collecting techniques are online debt collection and the use of debt collecting agencies.