Collecting Outside Accounts
( Originally Published 1918 )
Nature of Outside Accounts
Outside accounts are those not located in the same city or town as the collecting office. They must for the most part be collected by letter, as the expense of personal collection is—for the smaller accounts at least—prohibitive. Even with accounts of large size, the expense of personal collection is a very serious burden, and the mails are usually relied upon for their collection.
While the accounts of the usual retail concerns are mainly city accounts, the accounts of wholesale houses, manufacturing concerns, mail-order houses, and similar concerns are mainly out-of-town accounts. The methods pursued in collecting outside accounts are much the same in the various lines of business, varying only in detail.
Discounts as an Aid to Collection
The question of discounts is involved in both city and outside accounts. Outside accounts are, however, usually larger in amount than the ordinary retail city accounts, and for this reason the matter of discounts is more important.
The time allowed for the payment of accounts varies widely. The most common terms are 30, 60 and 90 days. Especially in manufacturing businesses, a discount is given for payment before the net due date; and this discount is usually sufficient to be a real inducement. For instance, in some lines a 90-day net payment is allowed, with a discount of 2 per cent for payment at 30 days, or 1 per cent for payment at 60 days, or an additional discount if payment is anticipated in 10 days. In other words, if, instead of waiting until the expiration of the 90-day period allowed him, the purchaser pays at the end of 30 days, he is allowed to deduct 2 per cent from the face of his bill. This is, in effect, paying him a little over 1 per cent per month for his money. In some cases the discount runs even higher; and, as the usual rate of interest on bank loans is 6 per cent per annum, it is obvious that such a discount is a very material concession. As a matter of fact, good business men expect to take advantage of all such trade discounts, even if they have to borrow the money to do so; and the failure to take all such discounts and anticipations is looked upon as an indication of weakness. In this way the discount becomes a powerful inducement for prompt payment of accounts. Frequently the discount privilege is abused by customers making deductions after expiration of the discount period. This should not be allowed. The discount is not a concession to trade, but a premium paid for the use of that money for a certain definite time, and the terms should be strictly maintained.
In some cases, where it is desirable to hasten payment of an account, a little pressure may be brought to bear without giving offense, by suggesting that the purchaser must have overlooked the fact that the account was subject to discount, or he would surely avail himself of it. Such a suggestion comes with the appearance of solicitude for the concern which owes the account. If properly made, it cannot give offense, and frequently brings the desired payment.
Prepayment of Accounts
The ordinary discounts which obtain in any particular line of business are extended to customers as a matter of course. Occasionally special discounts are offered for prepayment of accounts. Speaking generally, such offers are "bad business." They indicate either that the house which makes the offer is very hard pushed for money and cannot borrow it in the usual way and at the usual rate, or else that for some reason it is specially anxious to close out the particular account. It is inadvisable to produce either of these impressions if it can be avoided. A house might, of course, be in such financial condition that a con-cession of the kind would be justifiable for the sake of securing ready cash. Or the collection manager may see that a concern now able to pay is being conducted in such a way or is encountering such conditions that it might not be able to pay at the time the account falls due, and therefore deem an extra discount, even though it were heavy, a small price to pay for the collection. Under such circumstances the concession must be made regard-less of the impression produced.
Interest on Accounts
Interest at times enters into collection calculations. All open accounts bear interest from the date they fall due until paid, and some customers, even though they do not take their discounts, will pay on or near the due date in order to avoid payment of interest.
In those cases where discount for prepayment is not allowed, the purchaser naturally does not care to pay the account until its due date. If he pays promptly on the due date, well and good, but, if he does not, it may be advisable for the collection manager to call his attention to the fact that interest is running against him on the overdue account, and suggest that a prompt remittance of the amount will be accepted in full settlement, thus saving the purchaser from accrued interest.
The method of keeping track of outside accounts is very like that already described for city collections. When goods are shipped, an invoice is made out and sent to the purchaser as a matter of course. The duplicate of the invoice, as stated in the previous chapter, is made out at the same time, and comes, usually by way of the office—where the proper accounting entries are made—to the collection manager, who files it in his collection cabinet on the proper due date, i. e., 30, 6o or 90 days ahead, as the case may be. When the next due date comes round, if the account has not already been discounted, a statement is mailed to the customer, and this statement is followed—as described in Chapter IV—by two other statements at intervals of ten days each, or at less frequent intervals if the account is not to be followed so closely.
When the third statement has been sent out without producing any result, the account is placed in the past-due file. At this point the method of handling the account varies somewhat from that pursued in the case of city accounts. This is mainly due to the difference in the character of the account, though also in part to the difference in location. Personal visits from a collector are usually difficult, if not impossible; also the amounts are, as a rule, larger, and the concerns owing them more responsible than in the case of city accounts. Also, the fact that they are out of town renders another collection process available which is not usually employed in the collection of city accounts. This is the draft.
The collection letter is the collection manager's main reliance for out-of-town accounts. The tenor of these letters, their number, and the interval between them, will all depend upon the custom of the house and upon the nature of the account. Collection letters of this nature will be found discussed at length in Chapters IX to XI of the present volume.
As already stated, in out-of-town collections the draft is available—an agency not usually employed in city collections. The draft may precede, follow, or come in connection with the follow-up letters, as the practice of the house or the conditions of the particular account may dictate.
Drafts are a great aid to collections. They are, as a matter of fact, but little more than a presentation of the account by means of a collector, but this collector is a bank; and this gives the presentation a formality, a publicity and a weight, that makes it very effective. There is no real reason why payment of a draft presented by a bank should not be refused with the same readiness as a statement in the hands of an ordinary bill collector. As a matter of fact, however, the debtor does in most cases feel an injury to his credit in refusing to pay a formal draft duly presented through a bank, which he does not feel when he refuses a collector's request for payment.
Speaking generally, drafts should not be drawn with-out first notifying the debtor, as otherwise the draft is not so likely to be paid, and there is a strong probability of giving offense. When, therefore, a draft is to be drawn, the collection manager should write a letter, in such tenor as the circumstances may require, calling attention to the condition of the account and notifying the debtor that he will be drawn upon if the amount is not paid within, say, the next five days. Ample time should always be given for the letter to reach its destination, and for its reply to come back. If, at the end of the specified period, payment is not forthcoming, nor yet any satisfactory explanation of the delay, a draft is drawn and deposited for collection.
When the amount is small such drafts are usually made payable at sight. Where the amount involved is larger, it may be wise to give a few days of grace, making the draft payable at from one to five days' sight, according to the circumstances. It is better, where possible, to have the draft come through a bank other than that at which the debtor transacts his own business; for the moral effect is greater, and the "strange" bank is not so likely to favor the debtor by holding the draft unduly. Occasionally a bank friendly to the debtor will hold a draft sent to it for collection for several weeks, or until the sender of the draft has it traced.
The collection manager's draft is usually deposited for collection in the bank with which his concern does its business. A slip should be pinned to the draft, containing any instructions that may be necessary for the bank. If the bank with which the debtor does business is known, the collection manager can ask to have the draft sent to some other bank in the town in which the debtor resides. Where many drafts are drawn, it is quite customary to send to the bank with them some small fee to cover collection charges—usually ten cents for each draft; and this payment undoubtedly does secure better attention to the draft, and in the long run probably more than justifies the expense. The matter is, however, optional with the collection manager, as the banks make no charge for collection of drafts.
The fact that a draft has been drawn and deposited in the bank for collection does not lift any responsibility for the account from the shoulders of the collection manager. He must still watch it as closely as ever until the draft is paid. For this purpose his invoice should be placed ahead in the collection file such number of days as he thinks the draft should require to reach its destination, be presented, and the funds or a report be returned. If at the expiration of that time no report has been received, he may either place the invoice ahead a few days, so as to give the bank a little additional time, or, if he thinks best, call on it for a report as to the whereabouts and condition of the collection.
Banks as a rule do not make any extended effort to collect a draft. When it comes in they give it to a messenger for presentation, or in many cases merely mail the debtor notice, stating that the draft has been received, and requesting him to call and pay it. When the draft goes out by messenger he presents it for payment and leaves it, if it is paid, but otherwise brings it back to the bank, leaving notice at the office of the debtor for him to call at the bank and make payment. In either case the draft, if a "no protest" draft, is held over a day or two —or, as suggested, much longer at times—and then, if not paid, is returned to the party who sent it, with the briefest possible report, as "No attention," "No reply," "Not found," or such other statement as the circumstances require. If the draft is to be protested-as will be done unless it is marked "No protest," or instructions have been given that it is not to be protested—the formal protest follows its non-payment, and this adds protest fees to the expense of handling the collection until and unless these can be recovered later from the debtor. If the draft is paid, the collecting bank sends the funds to the bank from which it received the draft; the collection manager's concern is notified that payment has been made; and the matter is closed.
A Second Draft
Sometimes, when a draft has been drawn and re-turned unpaid, it is found effective to draw a second. draft. In such case a letter is written the debtor informing him that the draft drawn on him the instant has been returned unpaid; that the collection manager feels sure that this could not have occurred with his knowledge; and that he is therefore asking his bank to return the draft. This letter may be elaborated as far as is advisable, enlarging on the injury to the debtor's credit of refusing a draft, and the collection manager's confidence in his ability and willingness to pay this one when it again comes in.
This second draft coming so closely on the heels of the first, and preceded by a diplomatic and forceful letter, does bring a certain pressure to bear on the debtor, and is on occasion worth while.
It is perhaps not generally known that the express companies undertake out-of-town collections. When this method is to be employed, an itemized statement of the account is made up on a regular bill-head, a draft is attached, and this is turned over to the local express agent to be forwarded. Or, if the collection is in the form of a note, this note is attached to the statement of account in place of the draft. The express company then takes charge of the whole matter, presents the account and draft, and, if payment is made, remits the amount, less its charges for collection. The express companies are, of course, entirely reliable; and—as in the case of a bank draft—the publicity and formality of the manner of presentation is frequently effectual when other means fail.
Another variation of the ordinary bank draft is the "free draft" system operated by many collection agencies. Under this plan the agencies supply the collection manager with a book of draft blanks ready to be made out. On the back of each draft are printed instructions notifying the bank which presents the draft to return it to the agency—not to the sender—if the collection fails. If, then, the draft is not paid, instead of coming back to the collection manager, it goes into the hands of the collection agency and gives it authority to take the collection and the account into its own hands. The whole system is, of course, a scheme of the collection agency to get business; but the plan is sometimes more effective than the ordinary draft, as it carries on the instrument itself notice that the account will go into the hands of a collection agency if it is not paid.
Salesmen as Collectors
If neither letters nor drafts bring payment of a delinquent account, it requires special treatment. If its amount is material and its location not too far distant, it may be profitable to send a collector to see what personal influence can accomplish. If the distance is too great for this, the salesman who covers that particular territory can sometimes handle the matter to advantage. Salesmen should not, however, as a rule, be called upon to collect accounts. Selling and collecting are to a considerable extent incompatible. No matter how disagree-able the collection manager may find it necessary to make himself, the salesman is not personally involved, and on a subsequent trip he should be able, by tact and diplomacy —by deploring the rudeness and overbearing manner of the collection manager, and by judicious soothing of the customer's wounded feelings—to smooth the matter over, and, if he is a real salesman, start another account for the collection manager to wrestle with later. If, how-ever, a salesman must first sell his bill of goods and then turn round and force payment for them, with all the insistence, the inflexibility, and even the "bullying" that is sometimes required of a collector, he is thereafter persona non grata to that particular customer, and can rarely sell him goods again.
Collection Attorneys and Agencies
When all else fails, the account, if of sufficient amount to justify the measure, must be placed in the hands of an attorney or collection agency for attention. Under such circumstances it is, of course, very desirable that a reputable lawyer or agency be retained. It is not difficult to secure such a representative in any part of the country. Directories of attorneys are published in which the names of those who make a specialty of collection business and who are reliable are indicated. Also, many of the collection agencies are represented by attorneys in every part of the country; and collections referred to these agencies are placed in the hands of their special attorneys. The agency makes itself responsible for the reliability—and to a certain extent for the ability—of the selected attorneys.
The fees charged by collection attorneys are usually to per cent of the amount collected on small or moderate accounts, with a minimum fee of $3. On larger accounts the percentage charged decreases as the claim increases. The fee of the attorney or collection agency is deducted from the amount collected before this is remitted to the party to whom the account belongs.
The subject of collection attorneys and agencies and of collection by legal process is discussed in more detail in Chapters XVI and XVII of the present volume.
Delayed payments are not always the fault of the customer. It may be that the account is disputed and the customer is unwilling to settle until it is straightened out. If the difference is material, or the part of the account which is questioned cannot be segregated, he is entirely within his rights. If the amount is immaterial it can be suggested that the customer reserve enough to cover the claim until the matter can be investigated and adjusted, and meanwhile pay the balance at once. If part of the account is undisputed, get the customer to pay the part that is unquestioned, leaving the disputed portion, as before, for consideration and adjustment.
In any case of dispute, the customer's claims should be investigated fully and without delay, and he should, of course, have the benefit of fair and even liberal treatment. It is but seldom that a customer disputes an honest claim if the whole matter is presented to him clearly and fairly.
Variance of Records
Sometimes investigation of a "delayed" account will show that the records of payment on the books of the house do not agree with the payments the customer claims to have made. Such conditions are found most frequently in the case of instalment purchases where the time of the contract extends over a long period, and calls for the payment of numerous small amounts. The account runs along smoothly for a time, but then payments cease or become irregular, and the customer claims that the payments credited to him do not agree with those he has actually made.
When this form is filled out and returned to the collection manager, he can check over the records of payments as shown by the customer's report, and the record of payments turned in by the collector or sent in to the house. If the comparison shows that some remittance claimed by the customer has not been received, it must be traced. If the remittance was by check, this is simple. The check will have been deposited by the instalment house, and, if this has been done, the deposited and canceled check goes back to the customer. If, then, the check was really sent, the customer should be able to exhibit the canceled check. If he cannot, it shows either that he did not send the check or that it has gone astray. In either case, the customer can be called upon to stop payment of his check at the bank and send another check for the amount. If the transaction is straightforward, he will have no hesitation in doing this.
If remittance is made by means of any form of paper, such as a check, money order, or exchange, it can be readily traced. If, however, the customer alleges that the remittance was made in cash, the matter is much more difficult. The remittance, though sent, may have been lost or stolen before it reached the house. Or the customer, though entirely honest in his belief, may not have sent the remittance at all. Occasionally customers state that remittances have been made which were in fact never made, the claim being put forward with fraudulent intent. At other times it may be found that employees of the house have intercepted and stolen the missing payments. Speaking generally, however, the question of a cash remittance is purely one of veracity. Remittances should not be made in cash; and if the customer does remit in this form, the burden of proof that the remittance has been made, rests on him. If he cannot prove the remittance, the loss is his. On the other hand, where a good customer claims a cash remittance which has never been received, it may be good business policy to admit the claim without question—especially when the amount is small.
It sometimes happens that a dishonest debtor changes his location without notice to the house from which goods were purchased, this being done with the definite intention of evading payment of the balance due. In such case a registered letter with "receipt requested" should be tried. This, if sent to his last-known address, will often be for-warded and the receipt be returned to the writer. , The postmark of this receipt will give at least the name of the town where the debtor is located; and then he can usually be traced down. The name and address of the sender of the registered letter should be that of someone unknown to the debtor; and the letter should be sent in a plain envelope or one bearing merely the name of the person who signs the letter. Otherwise, the debtor might discover that it was from a creditor, and refuse to have anything to do with it.
Sometimes instalment houses circumvent this form of trickery, i.e., "dishonest" removals, by strategy. One plan of the kind is as follows: On the back of the lease or contract of sale blank spaces are left to be filled out by the salesman, giving the names and addresses of at least three near relatives of the customer. These will usually be furnished without hesitation at the time the purchase is made, the purchaser supposing they are to be used as references—which in many cases is true. But suppose the debtor, John Smith by name, has left for parts unknown, owing a balance of $100 on his contract. The collection manager then sends a letter to each of the relatives whose names appear on the contract. This letter is written on the letter-head of the concern's attorneys, is apparently signed by them, and reads somewhat as follows:
NEW YORK CITY, May 14, 1913.
Some little time ago your son, John Smith, was interested with others in the purchase of a piece of property. It now seems that the title to this property is not entirely clear, and we wish to take the matter up with Mr. Smith, to see if we cannot get it straightened out.
We find, however, that he has moved from his former residence, 86 State Street, and as the matter is of some importance to his welfare, we trust that you will give us his present address.
We enclose stamped envelope and ask that you kindly answer at once. Very truly yours,
WILLIS & JONES, Attorneys at Law
This whole transaction must, of course, be with the knowledge and consent of the attorneys whose names are signed to the letter. Upon receipt of such a letter the relatives, thinking that there is some business deal involved which may be of benefit to John Smith, will probably give his new address. In the settlement which follows, the instalment house seizes the goods, and John Smith may have time for meditation behind prison bars. This method of preserving the rights and property of the house is not overly nice, but it must always be remembered one is dealing with a dishonest debtor—a would-be thief—and that the ordinary rules of business etiquette do not apply.