A Study Of Debtors
( Originally Published 1918 )
Classification of Debtors
Debtors may be divided into four classes, each requiring different treatment. These classes are as follows :
(1) Good pay.
(1) Good Pay
This class comprises those debtors who either pay their accounts voluntarily on or before the due date, or pay when their attention is called to the fact that the accounts are due, or within a reasonable time thereafter. Any customer is considered good who has not reached the "past due" file, even though he may not pay on receipt of the first statement sent him.
Debtors in this class require but little attention. Their accounts should, however, be gone over regularly to see that they are paid when due. There is, in fact, a certain responsibility resting on the collection manager to do this, for it has happened many times that a good-pay customer has fallen from this high estate through pure neglect; i. e , his account has been allowed to run so long that it has either cumulated beyond the debtor's power of prompt payment, or his affairs have become involved so that he cannot pay the amount, or he finds payment so difficult that he tries to postpone it indefinitely or to evade it entirely.
(2) Slow Pay
The slow-pay class of debtors is usually large, and its membership is recruited from many classes and callings. These slow-pay debtors are not by any means "deadbeats." As a rule they fully intend to pay their debts, but for one reason or another payment is delayed and they are thus brought into the "past due" file. The failure to pay may be due simply to poor management on the part of the debtor, or it may be due to seasonal conditions, or to other circumstances over which he has no control, or in some cases it may be found that demands have arisen which he deems more important, or finds more urgent, than the postponed account. Sometimes it is just simply because the collection manager has not properly followed up the debtor, and so the money that should, and with proper attention would, have gone to paying that particular account, has gone elsewhere.
If slow-pay debtors have been previously on the books, the circumstances of their former payments should be studied. It will usually be found that while they have apparently no regard for the agreed terms of payment, they ultimately settle in full, perhaps at stated times, or perhaps at irregular intervals, depending upon the condition of their affairs. They always pay, however, even though it be according to their own idea of promptness. Their treatment of preceding accounts will probably indicate the proper method of handling the present indebtedness.
Slow-pay debtors are often found in the rural trade, where they depend on the crops for their income and pay their debts when they realize on these crops. In such case it may be necessary, and good business as well, to carry the debtor over several months until he gets in his own returns, when the account will be settled in full. Such debtors may perhaps be better classified as "deferred" rather than slow. They are good pay, but they pay on their own terms rather than on the terms of the concern with which they deal. Payment, though slow, is sure, and with recognition of the conditions and proper handling of the accounts, such trade is desirable and safe.
Where payment fails because of neglect on the part of the collection manager, there is but little to be said. It is the collection manager's business to work for and facilitate in every possible way the prompt payment of accounts, and if he does not do this he is not qualified for his position. If the debtor does not pay when payment is due, he should—diplomatically or otherwise, as the conditions may indicate—be asked to pay, and should be followed up thereafter till he does pay, or until it is conclusively demonstrated that he cannot be made to pay.
Others found in the slow-pay class are those who are honest, and whose intentions are perfectly good, but who, through some miscalculation, or unexpected demand, or through misfortune, or other cause, are unable to meet the payments as they mature. Such debtors require very careful treatment. The conditions should be carefully studied. Unless they are hopelessly down and out, payment is reasonably sure if the account is properly nursed. In any such cases small payments can usually be provided for, or the collector himself may be able to suggest means whereby the debtor may meet his payments, or it may be wise to let the matter rest until the debtor has had time to pull himself together and get on his feet.
Where poor pay is simply due to bad management on the part of the debtor, the account is one that requires close attention. Money is coming in and is going out, and the debtor's failure to pay is merely a failure to make ends properly connect. In such case the collection manager who is in closest touch will fare best. He should, under such circumstances, study the conditions, and carefully suggest such method of payment as may be best both for the account and for the debtor. Usually, as in the preceding case, small payments can be provided for; or it may be possible to find out when considerable amounts of money are coming in to the debtor, and, by careful management, to secure payment of the entire account at that time.
It is not uncommon to find debtors who, while perfectly good, defer payment as a matter of profit as long as it can be done without serious injury to their credit standing. Apparently they reason that they need not pay until they have to, and that the longer they keep the money in their possession, the longer they have the use of it. Accordingly, while not deferring payment so long as to subject themselves to suit or even to unpleasantly harassing dunning, they do wait until the collection manager's patience is sorely tried. Such debtors should be brought sharply to time by a firm and courteous letter. They are using the concern's money for their own purposes; and the practice is not honest and should not be permitted.
(3) Bad Pay
In this class of debtors are found those who are able to pay, but who will not pay unless and until payment is forced. Among these are men who are really hard up and who defer all payments except those which press hardest. Among these are also the "high financiers," who are good for the amount, and who pay at the last moment, but who wait until this last moment actually comes, thereby gaining the use of money for weeks and perhaps months after it should have been in the hands of the concern they owe. Men of this kind differ from those of somewhat similar tendency discussed under the slow-pay class, in being entirely reckless of their credit standing. In fact, they have no credit standing; and credit should really never be extended to them. When they do secure credit it is a reflection on the astuteness and efficiency of the credit department. Their trade is not desirable on any terms except spot cash.
The professional deadbeat, who gets credit wherever he can, and who pays only when he must, is also to be included in the bad-pay class. Men of this stamp never give attention to the demands of the collection manager, are rarely accessible to the collector, or, if they are discovered by the collector or by any accident call at the store, are profuse with many promises which are as easily broken as made. Such men should never be trusted at all; but, if through some accident they do receive credit, they should be followed constantly and relentlessly with letters, personal interviews, garnishee notices, threats of prosecution, and anything else that will bring pressure to bear upon them. The only hope is to make payment the lesser of the two evils, and this requires strenuous work on the part of the collection manager.
In such cases—and in other cases where non-payment is carried to the breaking-point of the collection manager's patience, but where suit is not yet deemed advisable —a form letter is sometimes used, written on the stationery of the concern's attorney. This is either signed by the attorney himself or—with his permission, of course —by the collection manager with the attorney's name, and calls the debtor's attention to the account and to the necessity of settling it at once in order to avoid suit. Such letters are at times effective, but should not be used too freely.
The same thing may be said of the practice of using blanks supplied by collection agencies, which purport to be sent by them, and refer the debtor back to the concern for settlement under pain of prosecution. The method is good on occasion, but is not to be used where future business is desired, or where the debtor is responsive to other means.
By relentless persecution the money can frequently be secured from the bad-pay debtor. Long before this point is reached, however, his name should have gone on the black list and have been turned over to the credit department, to prevent any further extension of credit, and indeed any further business transactions, except of the simplest and for cash. It is always dangerous to deal with a crook.
(4) Execution Proof
Debtors of this class have no disposition to pay their debts, and, having no property, cannot be forced to do so. The accounts coming under this head comprise the residuum from the other classes—the accounts which the credit department have so far utterly failed to collect. They are entered in the "Bad Accounts Ledger." This is to some extent a record of the failures of the collection department, but it is also, in a sense, the graveyard of the credit department, since it is the place where the bad mistakes of the credit man are buried. With proper work in the credit department, uncollectible accounts should be rare, and in some lines of business should be practically unknown.
No matter how bad accounts may be, they are not considered absolutely uncollectible until, as already stated, they have expired by limitation, or the debtor has died without leaving any property, has passed through bankruptcy, or has permanently left the country. Bad accounts not extinguished in one of these ways, but still apparently uncollectible, are written off to the Bad Accounts Ledger, where they are kept, and looked over at intervals. Then, if at any time a debtor's conditions change so that his account becomes collectible, proper steps can be taken to secure its payment.
In all his dealings the collection manager must bear in mind that most people are honest. He is dealing with men who have feelings, ambitions and aspirations as well as he, and when they evince a desire to do the fair thing he must meet them part way at least. Business cannot be conducted entirely on Shylock principles; and to treat others fairly and even generously is not only good feeling, but good business as well. This brings us to the question of compromises.
Should a debt ever be compromised? The one aim and object of the collection manager's work is to get money for his concern. If he is convinced that it is absolutely impossible for him to get all that is due, it is his duty to get as much as he can; and to do this he must on occasion compromise an account.
Compromises as to time are very much more frequent than compromises as to amount. The ordinary slow-pay customer wants time, but, if he is given this, will pay; and he is usually too desirable a customer to drive away by harsh collection methods. In such cases it is better to study his conditions and—either before or after the purchase—agree with him on terms that he can and will meet.
Time compromises—but rarely amount compromises —are also necessary occasionally with good-pay debtors who are temporarily embarrassed, or who get into financial difficulties through circumstances beyond their control. In such cases small payments extending over a considerable period of time offer the surest and best method of securing the money due; and the collection manager should have no hesitation in making whatever arrangements are possible, even though they be somewhat out of the ordinary.
Compromises as to amount are purely a matter of judgment and conditions. If the debtor cannot pay the full amount of his debt, or if he is able, but will not, and cannot be forced to pay the full amount, the collection manager must be content with what he can get. The matter then becomes one of judgment as to the debtor's ability to pay, and of trading to get him to pay up to this full ability. With the honest debtor, i. e., the man who would pay if he could, there is seldom any trouble in getting all from him that he can pay. With the tricky class—the debtor who could pay if he would, but who is execution proof—the whole matter is one of "jockeying." Unless there is something to be gained by the debtor in settling up the account, such cases are hopeless. Sometimes, how-ever, to escape the persistent, pestiferous and inopportune dunning of collectors and collection letters, or for the sake of effect, or for the sake of clearing the way so that he may obtain credit elsewhere, the debtor of this class is willing to pay something. It is the duty of the collection manager to make this something as material as can be forced out of the deadbeat debtor by every means in his control.
Advantages of Classifying Debtors
The successful business man of the present day is he who carries routine in the various branches of his business to the "last analysis," and a classification of debtors such as outlined in the present chapter will be found an important step in this direction. The study of the accounts receivable necessary in order to make a proper grouping gives the collection manager a close and intelligent knowledge of his accounts; and the classification, when completed, enables him to handle a much larger number than would otherwise be possible. This is so because, while there are always debtors who will require individual treatment, the larger number of delinquent accounts, if carefully and intelligently classified, can be handled according to a fixed routine and with form letters, so that a large part of the work can be done by the manager's assistants. In such cases, the form letters employed will, of course, be individualized, i. e., typewritten out in full with the parties' names and addresses, and signed with the collection manager's name, preferably in ink.