There have been a number of major national cases over the past several years where experienced collection companies were able to collect debts in full while creditors who agreed to a standard plan or tried to negotiate with the debtor ended up with lots of hassles and very little recovery. Here are some basic rules of thumb concerning when media companies should employ the services of a collection agency or legal firm.
Running The Numbers On Collection Firms
As the year draws to a close, now is the time many companies pay extra attention to past-due invoices. There’s always that little dance around accruing and writing off the unpaid amounts.
It should come as no surprise that making the decision to involve a third party to speed up the process is never as easy as picking up the phone or sending the email.
Many account representatives have a role to play in credit and collections that may even be spelled out in job descriptions. Since commissions may not be fully paid until the money’s been received, there’s also a strong motivation to support the collections process. Not getting the money in the door themselves can contribute to a sense of their coming up short on performance.
There is also the role played by business managers and others in approving the added expense of hiring a media collections specialist. In some cases, there is the response that spending money to collect on bad debt may be making a bad situation worse.
The qualms don’t completely disappear even when we decide to get outside help. When a collection agency is able to recover money, particularly when it does so relatively quickly, there can be a nagging thought that the business could have accomplished the same outcome — and saved the expense — if only it had worked the account a little longer or harder.
Whether we attribute it to buyer’s remorse or simply some Monday morning quarterbacking, Walter Sheltz, president of MMG Media Collections, says this happens fairly frequently. When his clients question whether they would have been better off continuing with their internal efforts, Sheltz suggests they let the numbers provide the answer.
“When the question arises, it is very helpful to go through the client’s history of cases with them, and also to help them analyze their day sales outstanding (DSO) and bad debt ratios,” Sheltz explains.
DSO is defined in MFM’s Understanding Broadcast and Cable and Finance, Second Edition: A Primer for Nonfinancial Managers as “a calculation that divides the total accounts receivable by the average net sales per day. The resulting number represents the average days of sales remaining unpaid from advertisers (or subscribers).”
While the target number of optimal days can vary from one media sector to another, Robin Szabo, president of Szabo Associates Inc., says he has found that a DSO of 45 days is a “pretty good goal” for companies with 30-day collections terms.” As Szabo pointed out in a Front Office column earlier this year, (“Proper Credit Management Yields Extra Cash”) a business will not have a DSO of less than 60 days if it waits until 60 days before its collections department begins contact.
Sheltz provides the example of a media company that had almost $10 million in receivables that dated back a couple of years. While the company was able to collect some of their money through outside collections, it ended up writing off about $7 million in bad debt.
In this particular case, an audit by Sheltz’s firm showed that the media company’s sales staff had very good records of their collection efforts, and the collection manager was very competent. However, when it came to debt that had become past due, the company’s CFO did not want to pay any outside collection fees. Sheltz comments, “In trying to save 15%-25% in fees, the executive lost his company millions of dollars unnecessarily.”
Sheltz also points out that another consequence of not getting help from collection experts was the extra work and stress for the company’s sales and collection personnel. In this instance, “they tried to find ways to collect the outstanding debt over a long period of time when it was clear that outside action was needed.”
While this serves as a rather extreme example of what can happen to DSO ratios and bad debt write-offs, Sheltz says most companies that do the math will come to the same conclusion: “Media companies who hold on to collection matters in order to save on fees generally have the lowest rate of recovery and by far the worst bad debt losses.”
His comments echo those of our collection agency experts during a panel at the New York Media Credit Seminar last month. Tammy Osborne from The Andersen Group commented that the mere action of turning an account over for collection lets the client know you are serious about collecting the debt.
In an article appearing in the November-December 2012 issue of The Financial Manager magazine, Sheltz provides these four simple tips that may be helpful for media collection managers and others in deciding when to call for outside help with a delinquent account.
1. When to pull the trigger: Sheltz says it’s time when a balance has gone past 150-180 days old. “When it’s gone this long, something is wrong. If a debtor is delaying you, they are usually delaying many other creditors. Trying to save on collection fees most often has negative bottom-line results over time.”
2. Find the right specialist: The place to start is with the agencies that specialize in media collections. “These companies should be your first choice. They often have other cases against a particular debtor and may be way ahead in the race for your money.”
But there may be exceptions to this rule. One of them could be an instance involving a smaller local market, where it may be more beneficial to use a general collection company. “They may have more information on where to find a debtor,” Sheltz suggests. In addition, the local collection agency could be part of a tight-knit local business community where everyone knows each other, making the pressure to get a debt paid more effective, he finds.
3. Take the legal route: According to Sheltz, “The debate over when to sue an advertiser is a challenge for many collection managers.” He believes part of the reason is that media companies do not like to get involved in the extra work and time that litigation will require.
While the costs of going to court may seem like throwing good money after bad, making a debtor appear in court — and forcing that debtor to pay an attorney to defend himself or herself — can be a very effective tool in collections, especially with larger cases. “If you do decide to file suit, make sure that you are using a company that has extensive experience and a track record of success,” Sheltz advises.
4. Deal with “workout plans” through a collector: Some situations may involve receiving a letter from an attorney or “workout specialist” that says it will be handling a particular advertiser’s debt issues. Sheltz observes, “These letters generally offer of low payout over a long period of time and indicate that if all creditors don’t agree to the plan, then no one will receive anything.”
However, this is another time when you can call your collection firm. He explains that “An experienced collection agency is often able to obtain more detail on a debtor’s true financial situation. They can help clients make an informed decision on the best course of action.”
As Sheltz notes, there have been a number of major national cases over the past several years where experienced collection companies were able to collect debts in full while “creditors who agreed to a standard plan or tried to negotiate with the debtor ended up with lots of hassles and very little recovery.”
As you look to close the books on 2012, I hope these suggestions are helpful in the process of deciding whether or not to call a collection agency for help in resolving a particular account (or two). Perhaps it will also help in formulating a New Year’s resolution about when you will seek outside assistance in the coming year.
For our part, MFM resolves to continue proving the information and insights that will be helpful to your business. In addition to the articles contained in our bi-monthly magazine, we offer an online “Ask the Experts” service for members of MFM and BCCA, the media industry’s credit association.
Postscript — Remembering Steve McIntosh
I can’t talk about advertiser relationships without thinking of Steve McIntosh, who was vice president and general manager of Belo Advertising Customer Service, a unit within Belo Corp. Steve, who passed away in 2010 was highly regarded for his pioneering work on a number of initiatives that advanced the industry credit and collections practices. A true expert in the field, he was also quick to offer his insights through the educational sessions at our annual conferences.
In tribute to Steve and as a way to foster the development of industry professionals, MFM is offering the 2013 Steve McIntosh Memorial Scholarship. Now in its second year, the scholarship will cover the major expenses associated with attending the association’s 53nd Annual Conference, Media Finance Focus 2013, which will be held in New Orleans from Monday, May 20, 2013, to Wednesday afternoon May 22. The scholarship will be awarded to an applicants who is employed by a media provider and have fewer than five years’ industry experience as of February 15, 2013. Complete details and an application form can be found on MFM’s website.
In the meantime, I hope you will add your suggestions on ways to improve DSO and other numbers in the coming year. Please add your comments below or join the discussion in our online forum.
Mary M. Collins is president and CEO of the Media Financial Management Association and its BCCA subsidiary. She can be reached at [email protected]. Her column appears in TVNewsCheck every other week. You can read her earlier columns here.