The Collections Animal
August 1, 2006
A typical restoration company may spend tens of thousands of dollars a year on training, new technology and consultants. They may even have a good business plan and plenty of customers. Yet they still have no better than a 25 percent chance of survival in the first five years.
Why? Is it because they didn't know the business? Is it because they didn't have the right people or the right technology? Is it because they didn't spend enough on fire and water damage education? Not hardly. More than anything else, the reason that restoration businesses don't succeed in the first five years is because they didn't spend a dime on collections and accounting training. While they may know a great deal about handling smoke, mold or hurricanes, their accounting systems are not adequately designed to deal with the impending disaster of a growing accounts receivable.
There are untold legions of consultants and companies willing to help with marketing, education and equipment purchases, but virtually none of them can help you deal with one of the largest problems of all - the collections animal. Why is this?
Restoration work has always been a cash management business at heart, even more than it is a logistical and technological business. In a disaster-response business an owner must respond to severe demand with limited resources while finding the cash to pull it off. This means that not only do you have to figure out how to do the next job, but also how to finance it. That's risk. That's our business. The solution is cash management and the method is collection control.
So how do you fight the collections animal? In order to be successful in your application of collections control in the restoration business, you must perfect three basic concepts: accountability, firm financing and awareness. And not only should you study these concepts, you should practice them daily with as much passion as you have in pursuing new claims.
Accountability in collections is the first and foremost step to improving your cash management. You've heard it before and you'll hear it again: accountability starts at the top and at the beginning. Not only should the owner of the company be aware of the daily accounts receivable position, but he or she should also take charge of it.
One of the worst things that a business can do is to let the accounting department grow too big. Unless you are a family business (resulting in a common focus), you should never put your accounts receivable in the hands of someone else. Have a roster of claims and track the deposits, deductibles, status and balance on the same sheet. Print this sheet weekly if not daily. Memorize this report. Anything that goes over seven days should have the attention of the owner (assuming you are payment on completion).
Even more importantly, never let the claim transfer to a collections department after the job has been completed. As a matter of fact, don't even create a collections department. Since accountability begins at the beginning, realize that if you take collections out of your project manager's hands, you are absolving them of responsibility to properly close the job and determine the customer's willingness to pay. This does not work. All you have to do to see if this is a problem is to look at how many quality control issues come back from collections after you make the call for payment.
A delinquent payment customer's best ally is a workmanship problem. It is also a delay tactic. If you notice that your accounting department has to schedule a call back or waive a deductible in order to collection, you need to establish better accountability. And if you do schedule a quality control repair, try to pick up payment before your technician leaves the jobsite. If you don't already utilize a "certificate of completion" on every job, now's the time to start. This document can establish a completion date that signifies payment as well. By forcing collections to become part of your project manager's daily routine, you will also improve your workmanship quality.
Just as collections can yield more quality-control issues, so can quality-control issues yield more collections issues. Create a culture of collection and force your project management staff to handle claims from cradle to grave. After all, when is it better to address payment issues; before you start the job or after you complete it?
If you currently have a collections department, this will not be an easy change. You will meet resistance and you might even lose some of your staff. What you will achieve, however, is a financially stable company that has a better chance of standing the test of time. That alone makes it worthwhile.
You might even decide to take the accountability concept a bit further and incentivize around collections. Now I don't mean pay more for what you should already expect to get from your staff. This is an incentive, not a gimme. Try incentivizing your project managers to collect faster than you think. As long as you make sure that you don't take it too far, thus causing marketing problems and lost claims, this can be very effective. Just remember to set realistic and tangible goals so that you and your staff can track progress and focus your efforts where they are needed most. You have a right to expect payment on completion, but you would probably settle for 30 days. Try setting up a bonus that disappears after 30 days and watch what happens.
As for payment upon completion, this should be a given. Firm financing is the second concept of collections management and it relies upon you setting up expectations for your customers in the beginning. "Payment upon completion" should not only be communicated in writing on everything from a work authorization to a certificate of completion, but it should also be communicated verbally during the first visit. If you decide to deviate from these terms, ensure that you obtain a credit application or prior approval. Most importantly, when you get the credit application, follow up on it and check the references and the information you require. Due diligence in the beginning can prevent headaches in the end. Obviously you may decide to grant exceptions to these collection terms, but make sure that the frequency and job size warrant it.
When dealing with a commercial account, it may not only require a credit application, but also additional effort. It is important to obtain information such as the correct billing address, phone number and requirements for payment. By obtaining this in the beginning, you can eliminate collection days in the end. Often, with most commercial accounts, the department that authorizes the work is different from the department that pays for it. This can be a wild goose chase unless you have all this information in the beginning. You might want to include information such as your federal identification number, terms of payment, a copy of the purchase order and a completed tax form 1099-MISC. Even if they don't ask for it at first, it will eliminate confusion as you near the payment deadline. And don't hesitate to call. A simple call to the billing department inquiring if "they have everything they need to remit payment" can often work wonders.
Another part of firm financing is the collection of finance charges as well. Most companies list finance charges up to 18 percent on their invoices and their work authorizations. The smart companies take this a step further and add on the financing charges to the original estimate and then offer their customers a discount for prompt payment. This not only sends the message, it does so in positive way. Discounts are always greeted more favorably than add-ons. You'll notice the difference in your collections days-to-pay average.
Deposits, escrows and deductible collection procedures can also assist in your pursuit of financing options. Large losses and mold remediation projects are excellent candidates for deposits and escrow accounts as they are often too large to self finance or cannot be interrupted for failure to pay. Not only does it help your accounts receivable, but in the case of mold remediation work, it can also protect your company from legal liability.
Deductible collection can also help your accounts receivable by establishing a commitment to the project and to your company. Although it will not single-handedly fix a collection problem, any deductible collected in the beginning means fewer funds to collect at the end - and, frequently, fewer adjustments when the money is already spent.
Although you may decide to waive this as a requirement for certain insurance companies, look for their assistance in collecting this if it becomes a problem. And with the recent trend towards deductibles of $1,000 or more, this collection concept has become more important now than ever before.
The third concept of successful collections management is awareness. While it may be the simplest concept, it is also the one that can be easily forgotten. Awareness has to do with your daily concentration on accounts receivable as well as any applicable lien rights. Although lien laws differ by county and state, you should track your activity on the project so that you know when you should provide notice of lien filing and when you should file. Awareness goes beyond just checking on collections by insisting that you also track collections costs. Just as you should charge finance fees to a customer for late payment, you should also track these fees as job costs as well. Keep in mind that late payments cost you and your company in the form of lost productivity, correspondence and some times legal charges. By tracking these charges and actually billing them to the job as you would materials, you can better understand what jobs and insurance companies to focus your efforts on. Remember, collections prevention begins at the beginning, whether that means establishing the rules or choosing which customer to serve.
Should your accounting department determine the direction of the company? Absolutely not. The same thing goes for general collection activities. What it should do, however, is provide balance to any marketing and service activities. A successful and well-rounded company realizes the potential of each of these and takes action. Now at least the rest of your success can be nothing but luck!