Reducing your bad debt by half is equal to increasing gross sales 20 times; the best way to do it is to know exactly who you’re dealing with.
Here’s an eye-opening statistic—cutting your bad debt in half has the same impact on your bottom line as increasing your sales 20-fold, according to Doug Godsman, project manager with Global Creditor’s Network. This means that in a company with $50,000 in bad debt write-offs, cutting that number to $25,000 has the same effect on net profit as increasing total gross sales by $1 million. Godsman based his calculations on 2006 results from the Fortune 500. He used them to get the attention of participants in a BCFM and BCCA (Broadcast Cable Credit Association) Distance Learning Seminar a few weeks ago.
As most collections pros know all too well, the best way to reduce the likelihood of bad debt, which Godsman said totaled $182 billion for the Fortune 500 last year, is by acquiring critical knowledge before making the sale. In addition to advertising-specific credit reports, which BCCA offers to its members, Godsman suggests that the sales team’s database should include information on the prospective customer’s legal structure, its key decision maker and the names and home addresses of all its owners, partners or officers.
A key item to consider is the length of business. Nine out of 10 new businesses will fail during the first two years and as many as 80% of those survivors will fail within the next five years. With that in mind, companies need to make sure that they have the proper bank information concerning new advertisers, including bank balances for the past six months as well as information regarding any outstanding loans.
BCCA credit reports and this financial information should play a major role in determining how much credit to extend to a new customer. Godsman encouraged credit and collection departments to work closely with their sales team during the selling process so that everyone is in sync from the beginning of the relationship. In addition to collaborating on the right amount of credit to extend, having the credit representatives involved in the beginning will make it easier in the event that a department’s collections representatives ever need to get involved in the relationship.
Something not typically covered in a primer on collections, but a key component to any successful relationship, is the impact of different personality types. Godsman reminded our seminar participants that collections will come down to personal communications and, since different personality types respond differently to different styles of communication, it’s essential to use the best method for connecting with the key decision maker in order to achieve an effective outcome. “Do unto others as they want to be done unto,” is the “platinum rule of negotiation,” according to Godsman.
After reviewing the unique communications styles that typify “promoters,” “relaters,” “analyzers” and “drivers,” Godsman pointed out how this platinum rule needs to be applied to the collections process. For example, if the person making the collections call is a driver, he will typically keep the conversation focused on the bottom line purpose for the call. However, if the key decision maker for writing the check is an analyzer, he will want lots of data and the chance to discuss it in detail. In this second case, be prepared for a lengthy discussion and put everything in writing, he recommends.
What really brings home the importance of using the right communications style is the likelihood that the process will occur over the phone, where body language, which typically accounts for 70% of interpersonal communication, can’t be experienced. Furthermore, tone of voice represents as much as 23% of the process, which means that the actual words used in a conversation amount to only 7%.
With that latest statistic in mind, it’s not surprising that communications using only words, such as e-mail, are the least successful method for debt collections. That being said however, a recent study found that a politely worded IM sent to the decision maker’s cell phone was extremely effective in stimulating a resolution. This technique for cutting through the clutter may become less useful as the technology becomes more widely available and the novelty wears off, Godsman warned.
While letters may not be effective in bringing about the final resolution, they are a fundamental component of the collections process. Letters can capture all of the details and they will resonate if the decision maker is an analyzer. If the decision maker is a driver, it will be important to highlight the key information at the outset. In all cases, collections letters should address the amount due, request payment in full, make the case for why immediate payment is in the creditor’s best interest and provide an additional motivating factor, such as continuation of open account terms.
Although a face-to-face meeting is the most effective means for reaching a desired outcome, the reality is that most collections are handled by phone. Still, Godsman reminded participants that either venue still requires confirming communications to the creditor’s personality type and that a telephone call will still be 10 times more effective than written communication. Using the right style is essential for putting the listener in a positive state of mind at the outset of the call. From there, the conversation should move toward mutual ideas for resolving the debt that represent a win-win for both parties.
However, these elements should not be addressed for the first time during the call. Preparation is as important as the call itself. Collectors must have as much information as possible about the account and the decision maker before they pick up the phone. Godsman couldn’t stress enough that knowing the person on the other side of the discussion is key to the collections team’s success.
It is important, according to Godsman, to keep the creditor talking once the collector has him or her on the phone. This will allow the necessary rapport to develop and will help to ensure that the collector proposes the right solution based upon the business needs that are top of mind for the creditor. “Avoid narrowing the negotiations down to just one issue by moving from the broad to the narrow. Your counterpart has different needs and, as the word suggests, you can’t assume that you know what they are,” he cautioned.
Showing empathy is as important as allowing creditors to talk and listening to what they have to say. Using empathetic phrases to repeat what the collections caller has heard is the best way for maintaining the conversation and moving toward a mutually satisfactory outcome. In contrast, talking too much and using listening time to prepare the response will lead to talking the creditor out of the conversation and the deal. “You were given two ears and one mouth, use them proportionately,” Godsman reminded participants.
Most importantly, the caller needs to act when it’s time to close. Cues include experiencing things like excessive pausing, questions about irrelevant specifics or agreeing with everything that’s being said. The collections call or visits needs to close with an appeal “they can’t say ÃƒÂ¢Ã¢â€šÂ¬Ã‹Å“no’ to, and always end with ÃƒÂ¢Ã¢â€šÂ¬Ã‹Å“thank you’ no matter what,” he advised. Examples of win-win offers include negotiating a lump sum settlement, balloon payments, a down payment followed by monthly payments and other “time versus amount” settlements that work for both parties.
Godsman’s presentation was packed with useful tips that apply to the collections process and more. BCFM and BCCA are very grateful for the willingness of our Associate Members, like Global Creditors Networks, to share this type of best-practices information. As this the tips provided by this presentation demonstrates, this knowledge empowers our members and improves the quality of business practices within our industry. From my perspective, now knowing that it’s a choice between cutting bad debt in half or increasing gross sales 20 times, I think we have everything to gain and nothing to lose by both taking a few minutes to prepare before calling clients with outstanding balances and making the effort to tailor our communications style to that of the person on the other side of the phone.
Mary Collins is the president of the Broadcast Cable Financial Management Association, a professional society for financial, MIS and HR executives in the electronic media. Her column appears here every other Friday. She can be contacted at [email protected] or 847-716-7000.