TOPIC 5: COLLECTION PROCEDURES AND TECHNIQUES

Collection Objectives and Structures

Once credit or a loan is extended inevitably the responsibility to collect ensues. The need for a
collection system is more acute in the Philippines at this present age and time since, as earlier discussed,
“the responsibility to collect is greater than the responsibility to pay”. In other words, one has to run
after his peso to be able to collect. A sale is not complete until the last peso is collected. It is therefore
imperative that a collection system should be set up if a company is to be assured of efficient collection.

The specific objective of collection management is to see to it that the unit or department
tasked with the responsibility to collect is able to obtain payment promptly at a minimum cost and to
maintain the goodwill of the customer or client at the same time.

Payment should be obtained promptly for any delay may jeopardize not only the liquidity of the
firm or bank but also may increase cost of money and other operational costs.

The first task of top management is to determine the individual or section or department
(depending on the volume and size of the receivables portfolio) which shall be responsible for collection.
An inquiry made of many medium-sized and larger enterprises reveals that this responsibility is normally
delegated to the same individual or section or department that carries the responsibility for approval of
credit sales.

The following have a duty to share responsibility in the collection function.

1. The Salesman – He should be constantly informed of the status of the accounts of his customers.
This way he could help in the collection efforts or at least participate in the collection efforts in
an advisory manner. Furthermore he will know how to deal with his customer on future orders.
The salesman is kept informed by furnishing him with a copy of all statements, collection letters
or other correspondence sent by the collection unit.
2. The Accounting department – in most companies, to save on overhead, the Accounting
department prepares and maintains the account ledgers of the customers/clients. If this is the
situation, then the collection section has to maintain very close coordination with the
Accounting Department since invoicing, customer`s ledger recording, preparation of statement
of accounts, debit and credit memos are techniques of collection and the end product of the
functions are tools for collection.
3. Other Department and Executives – under some circumstances, the departments or other
members of the organization may be involved in the collection function. This is frequently true
where difficult collection problems are being faced or substantial amounts are involved
COLLECTION PROCEDURES

1. STATEMENT OF ACCOUNTS – This must be prepared and sent at least once a month without fail.
Of course, it goes with the saying that statement of accounts must be sent promptly, and not a
few weeks after due dates. Another common error is to neglect the sending of such statement
altogether.
2. COLLECTION REMINDERS AND LETTERS – Should the sending of statement of accounts prove
unproductive, then the collection reminders should be sent, at first, mild, even humorous,
becoming more forceful in the succeeding ones.

Some helpful tips in the preparation of such reminders and letters:

a. Be brief – use no more words than it takes to put your message across in the tone of
businesslike friendliness. Tact and courtesy call for brevity as well as feeling for the other
fellow`s point of view. Even at the demand stage, a letter can be polite and still be brief – as
a matter of fact, especially at the demand stage, the few words the better.
b. Make your position clear – Never say anything that would in anyway be construed as
willingness to negotiate settlement – you have the right to prompt payments. Although in
settling the tone of your collection letters, you leave the customer an “out” a means of
saving face - you nevertheless establish in the very first notice the simple foundation that
the customer is obligated to pay, and that the creditor has the right to collect.
c. Say what you want the customer do; be specific – From the first stage of collection, your
primary objective is to get the account paid in full. Tell the customer in exact amounts what
you expect of him.
 d. Give him both “when” and “how to” – Don`t expect every customer to sit right down and
write out a check for the specified amount unless you ask him to do just that. Ask for the
money.
e. Use simple language – Every branch of management has its own special jargon or unique
use of words. Don`t be too sure of your customer`s understanding you if you ask them to
“ascertain the correctness of the adjustment on the invoice and remit the remainder
outstanding.
f. Play it straight – Humor sometimes works in collection letters, but it must be simple,
straightforward humor. Avoid sarcasm, angry tones. Never give a customer a reason to put
off paying you.
g. Give the customer a good reason to see things your way – Persuasion is still the best
collection technique available. Making the other fellow want to see things your way – that`s
persuasion. You persuade by giving subtly reasons why the other fellow should agree with
you.
3. Use of telephone – The most important and most widely used in collection tool is telephone. As
a collector, you will spend a good deal of your time on the telephone trying to bring delinquent
accounts current. Collecting accounts using telephone is a skill that can be learned, developed
and refined with practice. The purpose of this notes is intended to provide you with a fairly
comprehensive strategy for getting the most out of your telephone collection calls.
4. Collecting by personal calls – next to the collection letter, the personal call is perhaps the most
common method of collecting. At more advanced states of delinquency, personal calls in
collecting are usually made by collectors or solicitors employed by the creditor. There are times,
when the credit manager goes into the field to investigate a delinquency.
5. Dunning by wire/fax – Sending a collection reminder by fax is permitted as long as it does not
convey the idea that the debtor is a cheat, a fraud or any other such implication. In inquiring as
to when the bill will be paid or a threat to bring the account to a lawyer for court action is
permissible. Sending a collection fax offers several advantages. One of them is the speed by
which the message is received by the debtor. It creates on the debtor an impression of urgency
and determination on the part of the creditor to collect. It also offers a certain amount of
irritation and embarrassment on his part which may be sufficient impetus to prod him to pay.
6. Use of registered letters – a registered letter is sent as a preparatory step before filing of the
suit, to prove that a demand has been sent to the debtor.
7. Use of attorneys or collection agency – of course, if everything else fails, then there is no other
recourse but to refer the account to a lawyer or a collection agency for collection. Before a suit
is filed, however, the lawyer should first send a final demand letter.

THE COLLECTION CALENDAR AND SOME SUGGESTED COLLECTION APPROACHES

In all the foregoing collection efforts, it would be advisable to adopt a collection timetable. Such
a collection calendar, more or less, should be scheduled in the following manner. Of course, each one
should examine his own needs, particularly taking into account the number and volume of his
receivables, the staff and facilities available, the support expected from the other departments,
specifically the accounting department, the needs of the business and, of course, the credit and
collection policies of the company.

But, as a general rule, the following collection calendar could be an ideal set-up for a more
sufficient collection system

Days Overdue Efforts

5 Telephone
7 First Reminder
20 Second Reminder
30 Telegrams – to pay within 5 days
35 Collection letter – to pay within 5 days
45 1 – Secured Accounts – Attorney`s letter/ Field Visit
2 – Unsecured Accounts – Final demand letter/ field visit
60 1 – Secured Accounts – Repossession Extra – judicial foreclosure
2 – Unsecured Accounts – Telephone final follow-up/Attorney`s letter
70 Referrel to lawyer of secured accounts for replevin/judicial foreclosure; and
unsecured accounts shall be referred for appropriate legal/collection action by
lawyer/collection agency
90 1 – Follow-up action with lawyer on status of accounts referred
2 – Continuation of collection efforts – accounts not referred
3 – Write-off

COLLECTOR`S REPORT

To monitor the activities of the collector, he should be required to submit a daily report. In
order, however, to minimize paper work and for brevity, the following codes maybe used in the
preparation of such reports.

Codes for Collector`s report

ALD - Attorney`s Letter Delivered
CO - Cashier Out
CSU - Check Still Unsigned, ready on date
CB - Call back on date
CLD - Company Letter Delivered
FND - Foreclosure Notice Delivered
ID - Invoice Delivered
MO - Manager Out, expected to return on date
NMCB - No Money yet, Call Bank on date
OCSR - Office Closed, see Special Report
OV - On Vacation, expected to be back on date
PA - Party Abroad, expected to return on date
PIO - Paid In the Office, OR No. ____________
POCN - Party Out (expected to be back), left Collection Notice
PTP - Promise To Pay on date
SR - Special Report
SD - Statement Delivered
WC - Will Call when ready to pay
WP - Will Pay on date
WSP - Will Send Payment by Mail
OT - Out of Town

Detailed report is required on space provided at the bottom of Daily Collector`s Report. The
following should be covered by a Special report

1. Office closed
2. Transfer of Residence (specify new address)
3. Collection at another place (specify place)
4. Request for statements or invoices (specify)
5. All other findings or request not covered by the above codes.