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Collection Systems

( Originally Published 1918 )



The efficiency of the collection department depends largely upon the adoption and intelligent use of some simple, practical system of handling its routine. The essential feature of such a system is the arrangement of the work in such orderly fashion that the accounts will be automatically brought to notice at the proper time for attention, and a record be kept of each step of the collection until the final payment is made. This is accomplished by the aid of suitable filing devices, careful; indexing, and the application of an efficient follow-up system. Much care should be given to the planning and installation of the collection system, for this system is the mechanism through which the efforts of the department are exerted; and, if it is well devised, it makes possible the handling of thousands of accounts where otherwise only hundreds could be attended to.

Planning the System

In arranging the details of the collection system the policy of the house must be taken into consideration. What are the usual terms? How closely are collections to be made? What leniency shall be shown to delinquents as a class? These are not matters to be settled offhand by even the best of collection managers, but are to be determined by the heads of the business, who, having in view the welfare of each department and the best interests of the business as a whole, are in a position to decide with intelligence.

If there is a credit man, he and the collection manager should work hand in hand, and the organization of the collection department should be a matter of consultation between them. If the credits are well handled, and there is the proper co-ordination between the credit and collection departments, so that the information se-cured by the credit department is freely accessible to the collection manager, the work of the latter is more than half done.

When the organization and general policy of the collection department is once established, and the system under which it operates is properly worked out, the collection manager will find it possible to turn over a very large proportion of the detail work, such as posting reports, filing cards and papers, watching collections in the ordinary course, handling routine correspondence, etc., to trained assistants. It must always be remembered, however, that these very details are much more important than they seem, and that the assistants in whose hands they are placed must be careful and experienced. No amount of good judgment and cleverness on the part of the collection manager can offset an inefficient and carelessly operated system.

It may be noted in passing that a system once worked out should not be condemned too hastily, even though it does not at first come up to expectations. Give it time for a thorough test. Improvements can be introduced as defects develop, or as new or unexpected conditions arise; and the object should be to perfect the existing system rather than to substitute some other system in its place. Not only are changes necessary to remedy defects, but they must be made to keep pace with the business as it grows. The history of every really successful business is a chronicle of constant development and of equally constant adjustment to meet the demands of growth and changing conditions. The collection department must keep pace with the rest of the business.

Without an adequate system collections are haphazard. They are not attended to at the proper time; they are not handled properly when they are attended to; and frequently they are overlooked entirely for weeks at a time. The natural effect of such a lack of system is to invite delinquency in payment, to make collections more difficult and more uncertain, and to increase largely the percentage of loss from uncollected debts.

It is impossible and unnecessary to present the many different collection systems in use. All are devised to the same end, and differ in detail, according to the nature of the business served, rather than in the general plan. Consequently, a system in effective operation in one collection department would, with minor modifications, serve as a system for any other collection department. The chief requisites are that the system be simple, efficient, and as inexpensive as is consistent with first-class results.

A Working System

A system of keeping in touch with, and of attending to the accounts of, a business is outlined in the following pages. This system has proved simple and efficient in practice and can be adapted in detail so as to conform to the needs of almost any business.

(1) The preliminary work for the collection manager is done in the credit department. If the account is an important one, the standing of the purchaser will have been fully investigated, and much information that will assist the collection manager in case collection should prove difficult, is secured in advance. This information is supplied at the time the first invoice reaches him, or else is at his service when needed. With smaller accounts the credit department does not insist upon such particularity of information, and frequently will take chances that everything is all right. As a result, the smaller ac-counts are frequently the most troublesome the collection manager has to handle.

(2) The routine of collection begins with the sale. As goods are sold, the invoices are made out in duplicate or triplicate, the original going to the customer, and the duplicate copies being disposed of according to the general system of handling sales. One duplicate, however, always reaches the collection manager, usually by way of the office, where it is entered on the books in the regular way and its folio number placed on it for convenient reference later when checking up the account. The form of the invoice is immaterial to the collection manager, provided only that it gives the name, address, date, amount and terms. For him it is merely a memorandum of the transaction.

(3) From the office the duplicate invoice goes to the collection manager and is placed in an invoice file containing thirty-one divisions suitable for holding invoices, these divisions being numbered to represent the days of the month. These invoice files play an important part in the collection system. If 60 days' credit is given, two of them are necessary. If 90 days' credit is given, a third is required. More will be found useful if still longer datings are common.

The invoice file is found in various forms. At times it is merely a cabinet with thirty-one drawers in it, these drawers being numbered to correspond with the days of the month. Another form is somewhat similar to that of the ordinary card file, but large enough to accommodate the invoices behind thirty-one guide cards, which bear numbers corresponding to those of the days of the month. This form has the advantage of accommodating a large number of invoices in very small space. Another form sometimes employed is practically the same as that of the vertical letter file, this, however, being of smaller size and the invoices being contained in jackets with numbered tabs. A very simple impromptu file for a small business may be readily made by means of large manila envelopes numbered to correspond to the days of the month, and kept in numerical order in a desk drawer.

It is hardly necessary to say that the form of file is of but little moment. Any of those in use will serve the purpose if they are properly kept up and properly at-tended to. The file is an important and labor-saving device; but without proper attention its value is lost.

At the beginning of the year, file 1 contains the in-voices maturing in January, each under its proper due date. File 2 contains the invoices which fall due in February, and file 3, if a third is used, the invoices for March. The method of using these files is as follows:

A bill of goods is sold—say on the 15th of January, and on 3o days' time. In this case the goods should be paid for on the 14th or 15th of February, according to the custom of the house. The invoice is therefore placed in the February file under the proper date, and requires no more attention until that date is reached. If the in-voice calls for 6o days' time, it is placed in the March file under the proper due date. If, however, the invoice carries 90 days' time, it is placed in the January file under the 14th or 15th. This file then contains both January and April items. There is, however, no conflict. The 90-day item—due in April—comes into the January file, it is true; but it takes the place of January items which have already been taken out of the file for attention. There is therefore no mixing of items, the April items closely following the January items as these latter are removed. At the end of the month all the January in-voices have disappeared from the January file; and it is then devoted entirely to April business and becomes the April file. In like manner the February file accommodates the May items, and the March file the June items, and in this way the files are used continuously without interference between the incoming and outgoing items.

(4) On the back of each invoice the terms of sale are stamped and the due date of the invoice is entered. A rubber stamp is used for this purpose, the due date and any special terms of sale being filled in with pen or pencil. Each day the file automatically indicates the invoices which are due on that day. These invoices are then taken out and compared with the ledger to ascertain the status of the account; and if they are not already paid, the attention of the debtor is called to the fact that payment is due. The notice sent out is usually a simple statement of the account, stamped perhaps with the statement that the account is payable, or with a request that remittance be made by return mail. In case of city collections the invoice memorandum is sometimes placed in the collector's hands at once, for personal presentation.

The collection manager has entire charge of the accounts after the invoice is placed in his hands. He supervises the sending out of statements and directs the treatment of the accounts thereafter, all, of course, being done in accordance with the policy and understood customs of the house. Where monthly statements are the rule, these usually go out without special reference to the collection manager, as it is purely a routine of collection and does not require his 0 K. After the statement goes out, he may turn over certain accounts to his assistants, or to the bookkeeper or cashier, to follow out a prescribed routine, which then goes on with but casual super-vision on his part. Even these accounts, however, if any unexpected turn of events takes place, or the conditions are such as to require special attention, are at once taken over by the collection manager.

It should be needless to say that statements or notices to debtors should be sent out the day accounts are due. The whole collection system depends for its effectiveness upon prompt action at the proper time, and if notices are not sent out on the indicated dates, or such other action taken as may be necessary, the system is thrown "out of joint"; a bad impression is produced upon the debtor; and the whole effect is demoralizing.

(5) When the notice that payment is due has been sent out, the invoice is returned to the invoice file five days ahead of its former position, or even further if the debtor lives at a distance or if the system calls for a longer time. The date of the invoice will usually be sufficient to distinguish it from the invoices which come due on the date to which the unpaid invoice is advanced. If, however, the collection manager so desires, a more definite indication of the overdue invoices may be secured by means of a subdivision of the compartment, by a colored separating sheet, by stamping the invoice "Overdue," or by pinning to it a colored tag plainly printed or stamped "Overdue."

If at the end of the five days the account is still unpaid, it is regarded as delinquent, and the invoice is re-moved from the filing cabinet and placed in an ordinary vertical file under alphabetical arrangement. A letter is then written to the debtor calling attention to the fact that his account is overdue, and a carbon copy of this letter is attached to the invoice.

(6) It is to be remembered that the invoice is now no longer filed by date, but alphabetically, together with any letters or other material relating to it. Thus the invoice itself no longer serves as an automatic reminder of the account and its condition, though it is still at hand where it can be readily referred to at any time. To sup-ply a date memorandum of the account that will automatically bring it to attention, a card is made out and filed in. another vertical filing case, sometimes called the "tickler," which, like the larger filing cabinets, is divided into thirty-one compartments, each representing a day of the month. In this filing case the collection card is filed ahead to the next date on which the account requires attention, the time varying according to the system. It then serves as a reminder and a concise record of the account, and is filed ahead from time to time until the account is finally paid. When this consummation is reached, the card is removed from the tickler and destroyed, the invoice itself is taken from the alphabetical file and placed in the general office files, and the transaction is closed.

The handling of accounts after they have been placed in the tickler file requires the use of statements, notices, letters, drafts, forwarding of the account to attorneys or collection agencies, and various other accessory acts and instruments in order to secure final settlement. These very important matters all go to make up the collection system, and will be found treated separately in their proper places. A careful record should be kept of all that is done. This record may be kept on the collection card; or a loose-leaf ledger will be found convenient and practical.

Statement of Accounts

Under the system outlined, each invoice is treated as a separate transaction, even though the same customer may have two or more invoices "in process" at the same time. If, however, two or more bills of goods have been purchased during the month, and a single statement covering all these purchases is sent out on the first of the month following-as is usually the case—no material modification of the system is necessary. In such case the individual invoices are not sent to the collection department; but on the first of the month there is sent to the collection manager a statement of the customer's account, covering all his purchases for the previous month, with perhaps the separate invoices attached; and this statement is handled in the same manner as the individual in-voice. This plan obviously saves much time in handling.

A combination of the two methods is easily possible. Transient customers can be handled under the separate invoice method; while customers who usually purchase more than one bill of goods in a month can be handled under the statement method.

Branch Houses

If a house operates branches, each branch will employ the same system as the head office, but a ledger account for each customer will be kept at the head office as well as at the branch. The branch house should send in weekly reports of its sales, and also of its collections, which are to be entered in the ledgers devoted to the records of the branch. It is then the duty of the collection manager to see that the branches keep their collections up to date. This must, of course, be done by correspondence.

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