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Accounts Receivables Game: Pass or Pursue?

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Should our shop hire a billing service that charges 2.5 percent commission to approve credit and collect money on outstanding bills of more than $100,000?

This series focuses on whether heavy duty shop owners should pass or pursue on the risks they commonly confront.

I opened Scheffer Truck Service in Cape Girardeau, Missouri, with my wife Debe in 1997. We handled the accounts receivables at our shop but began to notice that many of our customers were taking longer periods of time to pay their bills. We picked up a few fleets that had 45- to 90-day collection cycles, so we experienced receivables amounting from $100,000-$125,000 at any given point.

Todd Scheffer at Scheffer Truck Service

Photo courtesy Scheffer Truck Service

Todd Scheffer, co-owner of Scheffer Truck Service in Cape Girardeau, Missouri.

It was taking a lot of time to keep track of who owed us what. Plus, since we were constantly calling people but had limited success collecting money, this end of the business tied up valuable resources in personnel and minimized the cash flow in our operating capital. So, we began to think about other options and made a bold move. We considered the possibility of hiring a billing service to collect the money and approve credit for our shop in exchange for a 2.5 percent commission fee.

After going back and forth about our accounts receivables situation for a few months, we came up with a list of pros and cons to help us decide on what to do.

Risks

  • We may lose business if an out-of-state billing service doesn’t properly handle our customers.
  • It would be a big investment for our shop to pay the service 2.5 percent commission on debt up to $125,000.
  • Existing customers might be unwilling to accept a change in the way we collect payments, since we would no longer be personally dealing with their credit.

Rewards

  • Having an outside billing service take over our accounts receivables would free up $100,000-$125,000 in operating capital.
  • Not dealing with those dreaded payment due phone calls anymore. We wouldn’t have to hear stories from customers about their inability to collect their own receivables in a timely fashion, which was preventing them from paying us on time.
  • It would take the grudge aspect out of the equation for both sides. I took it personally if someone didn’t pay me, communicate with us or answer/return phone calls—especially when I knew he or she had the funds to cover the bill. And, since we live in a small town, word travels fast when customers purchase a new piece of equipment for their own business before paying what they owe us or have owed us for several months.
  • We wouldn’t need to invest in employing a full-time person or in training our own team to learn how to do collections and credit approval.

Resolution: Pursue

We made the decision to hire a billing company because of two major factors: It would take the personal aspect out of the collections process and free up our operating capital. Plus, we wanted to expand the services we provide, which we had been unable to pursue with more than $100,000 tied up by customers who couldn’t or wouldn’t pay their bills. For example, with a portion of the freed up funds, we purchased alignment and hi-rail equipment and got our techs trained for railroad vehicles.

It’s a pretty good feeling to see your billing service owed $125,000 and know that you’re not responsible for collecting the debt.

In making the decision, we narrowed it down to two possibilities. I spoke with both companies and ultimately made my choice based on how they treated me. Now, it’s a pretty good feeling to see your billing service owed $125,000 and know that you’re not responsible for collecting the debt.

Of course, using an outside business has its own drawbacks. We still must submit a deposit scan every 10 days that includes all our invoices, along with a form supplied by the service. If we don’t meet these deadlines, we become responsible for that money. Plus, our billing company doesn’t always handle things in a timely fashion. Sometimes it takes weeks or even months—and several phone calls and emails—to get a simple issue resolved. It definitely gets a little frustrating when you’re paying them a 2.5 percent commission, and they still can’t do what they’ve been tasked to perform.

Even with these issues, though, I don’t think we would ever go back to not using a billing service.

 

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