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Before you
started to work in accounts receivable, what was your
perception of bad debt? Was it accounts that were out of
business, filed bankruptcy, 120 days, or even 365 days past
due?
People have different definitions for bad debt and they vary
widely. Your job is to recognize the warning signs of
impending trouble, so that you can see to it that you get
your invoices paid sooner.
Like the Red Flags (click
here to learn about the Red Flags), the Three Stages
of a Debtor issue is another debt identification tool.
Recognizing an account that is about to become a problem is
the key to successful collections.
Educating yourself and understanding the Red Flags and the
Three Stages of a Debtor are essential to debt
identification. You’ll notice that the Red Flags are
included in each of the Three Stages of a Debtor process.
Here are the three stages that lead to delinquency. Failure
to identify a potential debtor in the first two stages can
result in an account being uncollectible.
Three Stages of a Debtor
Stage 1: The debtor tells you, “There’s no problem!”
Warning signs
● Explanations and excuses
● Debtor expresses optimism
● Partial payment
made
Stage 2: The debtor expresses some concern by saying
something like, “How am I going to pay everybody?”
Warning signs
● The debtor may have good intentions
● Reality sets in and the debtor
realizes that there is a problem
● Debtor pays essential vendors, but
not others (i.e., rent, phone, payroll,
etc.)
Stage 3: The debtor faces the reality of his situation
and may say, “I just can’t do it.”
At this point it’s simply too late
● You may find that the phone is
disconnected
● The debtor gives up and closes the
company’s doors
● Your money is gone
Another important aspect of collecting debt is your mindset.
If your head is in the wrong place then you’ll leave a lot
of money on the table, and your business will suffer
unnecessary cash flow problems.
If you give in to the following thoughts, you’re simply
inviting bad debt, and until you kick yourself out of that
mindset, no one can help you. You can kiss your money
good-bye.
Thoughts that lead to uncollectible debt
● “We don’t place accounts until the
company is out of business.”
● “The only problems we have had are
bankruptcies.”
● “We just keep calling them and then
they eventually pay.”
● “We just write them off.”
● ”I’ll give these accounts that are
over a year old and see how a collection
agency does with them.”
Remember, the goal is to improve your bottom line. When you
allow accounts to get old it will cost you money. |
