One of the least glamorous aspects of your business is chasing down money you are owed. Cleaning up Accounts Receivable is far from rewarding and can be downright ugly at times – definitely not the reason you got into business.
But, unfortunately, debt collection is a part of every business and it is worthwhile to implement strategies and processes to keep cash flow positive, especially during the summer months.
Some salons don’t try to recover past debts at all, essentially leaving money on the table every month. Let’s discuss some of the good methods of managing this process and some tips for keeping accounts receivable at a minimum.
It’s worthwhile to implement debt collection processes to keep cash flow positive, especially during the summer months.
After credit has been extended to a customer, the next step is to effectively manage the billing process. It’s important to send invoices/reminders that are accurate, look professional and are sent in a timely manner. You may also want to establish appropriate customer service resources to handle billing inquiries when they occur.
Unfortunately, managing delinquent accounts is often one of the most time-consuming aspects of the accounts receivable management process. The goal is to set priorities and strategies for collecting on these accounts while balancing results, costs, and the need to preserve the customer relationship – an important consideration as most companies understand that it’s more profitable to keep a current customer than to acquire a new one.
In the unfortunate event that an account has been “charged-off,” businesses typically will pass the account to a third party to recover the funds in a legal and responsible manner, while at the same time insulating the customer from negative associations. The recovery process often utilizes professional collection agencies and attorneys to manage the entire process.
Most agencies charge a percentage (30-50%) of whatever they collect. The problem with this process, especially when considering small EFT decline balances in the salon industry, is that percent-based agencies don’t put much work into these accounts. When a $120 account is placed with them, they instantly justify the amount of effort they will give it based on their profit margins. If their fee is 30%, the company stands to generate $36 in revenue. Of that, only 15-20% goes to the collector who is supposed to be “working the account.” For a $7 commission, how much effort do you think will be put into the collection of your EFT decline? This process has resulted in historically low recovery. National averages for collection agencies have ranged from 9%-14% recovery – not exactly stats to be excited about.
There are alternatives to traditional collection agencies that exist in the marketplace today. Flat-fee agencies offer you the peace of mind that your accounts will get the attention they deserve. When you pay a flat-rate per account, you essentially “buy” a process. Agencies that charge in this manner have a set number of communications that will take place for that flat fee. You keep 100% of the fund recovery. As a result, the recovery rate from these programs is typically 3-4 times higher than traditional collections.
Take a look at your processes in order to manage this important part of your business. The result will most likely be better cash flow during these summer months.
About the Author
Chad Hankinson is the Vice President of Helios LLC (a division of New Sunshine) where he leads the teams for Helios Point of Sale (gohelios.com), the New Sunshine Marketing Hub (newsunshinehub.com), and Salon Stream (salon-stream.com). For the past two decades, Chad has actively built teams and software solutions to help small businesses grow, and build more successful relationships. Contact him directly at firstname.lastname@example.org.
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