No advertiser wants to cut back on advertising, especially when there are fewer customers walking through the door. These tougher times may give media companies a reason to rethink their credit policies to make sure that avails don’t go unsold. Tough times should also spur you to shore up the collection side of your house to keep your bad debt from mushrooming.
In an article in the November-December issue of MFM’s The Financial Manager magazine, MFM Board Member and President of Szabo Associates, Robin Szabo, reminded our members that, in difficult economic times, accounts are more perishable and collection recovery of past-due receivables decreases.
Despite the impact of tougher times on advertisers, Szabo Associates found that some of its clients have been allowing the troubled economy to compromise enforcement of their payment terms. For example, they were extending the time they permit receivables to age before beginning formal collection efforts. This reaction can be very damaging to a station’s day sales outstanding (DSO) ratio; as discussed in an earlier column, DSO ratios are indicators of a media property’s financial health.
Rather than taking actions that weaken the station’s financial condition, Szabo provides ten tips for instigating reluctant debtors to stay current. Here’s a summary:
1. Monitor troubled industries. Some industries and some areas of the country are invariably hit harder than others in difficult economic times. Regularly review financial magazines, newspapers and financial Web sites to help you stay abreast of these industry sectors and markets. And remember to keep your sales staff aware of the latest economic developments affecting your customers.
2. Watch for “red flags.” Observing a customer’s behavior is one of the best ways to recognize signs of trouble early on. Have the customer’s paying habits changed? Has the customer requested a hiatus during an advertising schedule? Has the customer attempted to cancel an existing contract? Has the customer defaulted in any way? If the answer is “yes” to any of these questions, get an updated credit report and discuss the problem with the customer immediately. Also watch for delaying tactics. If the customer fails to pay after the allegation of a dispute is proved groundless, place the account with a third-party collector.
3. Prioritize collection efforts. Make new customers your first priority. Even if the amount owed is small, allowing a new customer to set a precedent for late payment will encourage a pattern of delinquency as well as an expectation that late payment is acceptable. Go for the “high stakes” as your second priority. If you don’t have time to call every account, call the ones with which you have the most to lose if they fail to pay. Target the slow pays as your third priority.
4. Schedule your efforts according to your terms of payment. Start the collection process when the account falls 15 days past due. Follow up at least once a week with the person responsible for payment. Revoke credit privileges in accordance with your policies and procedures.
5. Team up with sales. Credit and collections departments need to develop a mutually beneficial relationship with their sales reps. Communicating regularly on both an informal and formal basis, helps to reinforce understanding of the sales perspective and encourages sales teams to inform you of any cash flow or management problems the customer may be experiencing. Make sure salespeople reinforce your payment terms at the time of sale on new accounts and get their help in collecting a delinquent account.
6. Document all communications. Get confirmation of responsibility for payment at the time of sale. If an agency is involved, clearly establish a “joint and several” liability position on all written contracts, invoices, and correspondence. Notify all parties involved of your terms and conditions. Restate your credit terms in a “welcome” letter and keep a record of every collection effort.
7. Relate to your customer’s situation. Find out as much as possible about the circumstances surrounding the delinquency and prepare yourself psychologically for the collection call. Try to anticipate the debtor’s responses, keeping in mind the heightened emotions and added stress that an economic downturn can induce. Foster an atmosphere of cooperation and mutual respect. Try to keep your sense of humor. A bit of tasteful, well-placed humor early in the conversation can help set the stage for collaboration and agreement.
8. Make the most of the “tools of the trade.” Assemble all documentation prior to making the collection call. Make sure the account activity information is accurate and up-to-date. The time and effort you made to prepare for the call also sends a clear message that you intend to collect. The telephone is still the collector’s best friend and, short of a face-to-face meeting, the best tool for relating effectively with the debtor. After you make your statement, say nothing and wait for the debtor to respond. Silence is an often overlooked and underrated negotiation tool. Listen carefully. The explanation may provide additional information about the situation, clues about what might motivate the debtor to pay, and ideas for a mutually agreeable solution.
Once you have reached an agreement, “recap” the arrangement during the call and in a follow-up letter. Allow only sufficient time for the check to arrive and for transmittal to take place, and then call the debtor if the money fails to show up. Use “form” letters to conserve time, effort, and cost. Organizations should develop their own “form” letters with two or three variations of each message. The style should be clear and uncomplicated; the structure should be simple and easy to follow, and the length should be short. The “First Reminder” letter should be mild and non-accusatory. The “Second Reminder” letter should express puzzlement – in a non-accusatory way – that the First Reminder has gone unanswered. The “Third Reminder” letter should reflect growing concern and include a positive statement to motivate the debtor to pay. If the “Third Reminder” elicits no response, consider using another method, such as a personal visit. The “Final Demand/Other Action” letter should make your final request for payment and include a statement of your next action if the debtor fails to pay, which usually means referral of the account to a third-party collector.
9. Enlist the services of a third-party collector. It is practically impossible to totally eliminate overdue accounts and bad debt. A good collection agency can improve your bottom line by maximizing recovery on past-due accounts while preserving your relationships with your customers. Choose a collection agency with which you want to form a long-term partnership. Turn over accounts to your third-party collector when they are 90 to 120 days past due, depending on how perishable they are. Accounts in more volatile industries should be turned over at 90 days, while those in more stable industries may be allowed to age longer.
10. Maintain balance. The current economic downturn has taken a significant toll on consumers and businesses, many of which will continue to feel its effects for some time after economic reports indicate that the cycle has ended. Where there is adversity, however, opportunity is never far behind. The opportunity for media organizations at this time is to maintain a healthy balance between firmness and understanding, diligence and flexibility, analysis and creativity.
As Szabo concludes, organizations that follow these steps will reap significant benefits from those efforts not only in the short term, but also in the good times ahead.
Members of MFM, the Media Financial Management Association, may read a more detailed account of Szabo’s ten tips in the current issue of TFM, which should be on their desks now. They may also access it online in the Members Only section of the Association’s web site, www.mediafinance.org. Those interested in talking with Robin directly may call him at (404) 266-2464.
As Robin mentions in Point 2 above, and as members of MFM’s media credit reporting subsidiary, BCCA, know first-hand, a current credit report can be an invaluable tool. BCCA members have access to both current media-specific credit reports and to a member-generated “hot list” of troubled companies. For more information about BCCA, go to www.bccacredit.com.
–Mary M. Collins, President & CEO, Media Financial Management Association
