Collecting on bad checks

I was an internal auditor for a supermarket chain. Bad checks were always a problem and the write-offs and losses were too great to ignore. We thought the company had a good set of policies and procedures for “working” bad checks, but the collection success was inconsistent at best and generally poor. Here is how it was supposed to work:

Each store had its own separate bank account. The bank was supposed to automatically resubmit bounced checks for payment. Often, a day or two later, the customer’s account would again have enough of a balance to cover the check. If it was returned a second time, the bad check was sent to the store.

The store was supposed to have a file of bad checks and either a notebook or index cards or some other way of controlling the checks and documenting the collection process. From an accounting perspective, these were carried on the store’s books as an asset – Bad checks – essentially an accounts receivable. The store manager, responsible for the profitability of the store, did not take a loss on the bad checks until they were officially “written off.” When they were written off and sent into the main office, the main office would send them directly to a collections agency. The success rate of the collection agency was less than 10%.

I had one auditor who was particularly interested in this topic because he saw a potential for a nice little side business. He read several books on effective collection techniques and it seemed that our procedures were pretty much on target. Here are some key points:

Make direct contact with the customer by sending a standard collection letter IMMEDIATELY. This can be automated and customized via a form letter.

Call the customer and speak directly to the customer.

Be respectful and understanding and empathetic.

Be polite

Be firm. Do not accept any excuses. Be firm in requiring the debt be paid.

Offer to accept small, regular payments.

Send a second collection letter.

Continue to make direct contact with the customer if they do not meet their promised payment schedules.

During routine store audits, we would often find many OLD bad checks in the file just sitting there. The store manager was simply avoiding booking the loss. We required them to be written off when we found them.

We realized over the course of a number of years experience that store associates HATED having to work the bad check file. They did not like calling the customers, they did not like confrontation, they were not set up to easily send out collection letters. They always put off bad check collections if they could find any excuse, so the checks just aged, got old and “stale.” They also often assigned the least experienced person to the job as low person “on the totem pole.” Finally, we would also find stores that were not set up for automatic redeposit of the bad checks with their bank.

We decided to do a test. We chose 6 stores. We made sure all stores were on automatic redeposit.

2 stores did nothing different.

2 stores were required to send their bad checks directly to the collection agency.

2 stores were required to send their bad checks directly to the internal audit department.

My key auditor received the checks and put into practice all the standard recommendations and followed them to the letter, meticulously.

We ran the test for about 3 or 4 months and then summarized the results.

Internal audit was the most successful of the three methods by far. The collection agency was second. The store was dead last. This was proof to us that the policies and procedures were good, but they needed some updating. All the store needed to do was to follow them.

Using this scientific method was very gratifying and fun. But we were also able to add real bottom line value to the company, too.

The lesson I learned was that collections is not an art, it is a science. Just follow the checklist. Follow the yellow brick road to the pot of gold at the end of the tunnel, to mix and mangle a metaphor or two.



, , , , , ,

Leave a Reply

This entry was posted on June 24, 2011 and is filed under Collections. Written by: . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.