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When Does Outsourcing Accounts Receivables Make Sense?

Aug 17, 2007
Companies continually make choices about which internal departments to grow depending on their potential cost versus profitability. In this modern age of business, outsourcing is a very beneficial way to essentially add entire departments without ensuing associated costs of growing departments in-house. But which pieces of the business should be outsourced? Operations such as sales and technology development are generally best handled in-house, as these are full-time needs and are at the heart of any company's essence.

However, tasks that require lots of costly resources, specialized expertise, and are not necessarily full time needs such as advertising and collections are often best handled by outsourcing agencies. But how does accounts receivable fit into the mix? Some collection agencies now offer full service, accounts receivable outsourcing packages. These collection agencies not only begin collections on bad debts as soon as necessary, but also manage customer accounts to prevent bills from entering into collection status.

On the surface, AR may seem like a function that can be handled in house by non specialist staff-and this may be the case for smaller businesses. However, as businesses grow, managing accounts, preventing past due accounts, and handling those that enter into collection status may become too cumbersome to be handled without professional intervention from collection agencies and their outsourcing programs.

Collection agencies already have the processes in place to manage customer accounts and the tools at hand to track down debtors who have relocated without a forwarding address. They have the trained staff in place to make timely phone calls and follow the protocol of the latest consumer protection laws. In other words, collection agencies can handle things quickly, identifying accounts that show early signs of delinquency and addressing the problem quickly, thus reducing bad debt.

Hiring collection agencies to simply go after debts once they've reached past due status is much costlier than preventing the problem in the first place though a tightly controlled accounts receivable process. Statistically speaking, once an account is three months overdue, you're likely to only collect 73 cents on every dollar. After six months that figure dwindles to 50 cents on the dollar and down to 25 cents after one year. Quite often, the cost of bad debt collected by collection agencies after the fact is much higher than prevention through outsourcing.

The right time to outsource accounts receivable duties to collection agencies will be unique for every company. You'll want to calculate your current bad debt and compare it to the average in your industry. If you're bad debt is equal to or above that of the industry average, you're losing more money than necessary by not having an efficient accounts receivable process. Relying on collection agencies as an accounts receivable outsourcing option is a way to get bad debt under control quickly and without any major up front cost.
About the Author
The author is a freelance copywriter. For more information about what a collection agency can do for you, visit www.AABUSA.com.
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