As the cannabis market has started to slowly transition from COD to companies extending trade credit, slow paying and non-paying customers are bound to appear. And, when you start extending trade credit you will have an account receivable and when your accounts receivable starts to become past due or what is commonly referred to as “aged” it is vitally important to take proactive steps to maintain consistent cash flow in constantly changing market conditions.
In our current economic times, a savvy management understands that managing the cost of doing business, especially in the cannabis market is vitally important. In all industries cash is king, but without cannabis companies starting to extend trade credit to your customers, you will never be able to sustain significant growth beyond a certain point. And, if you start extending trade credit, having too many delinquents paying customers can bring your business to a standstill. Don’t let your desire for revenue growth provide the basis for allowing your customers to not pay when they are supposed to as slow paying customers will severely impact your company’s cash flow and bottom line.
THE COLLECTIBILITY OF DELINQUENT ACCOUNTS – ALL INDUSTRIES
A survey by the Commercial Law League of America (CLLA) illustrates how much more difficult it is to collect delinquent debt as it ages.
Source: Commercial Law League of America
According to the survey, after only three months past due, the probability is that you will only collect about $0.71 of each delinquent dollar. After six months past due, only about $0.55 of each dollar will be collected. And after one year past due, you will have to settle for about $0.22 of every delinquent dollar. Essentially, time is your worst enemy. If you extend trade credit and have slow paying customers, the sooner you implement aggressive collection proceedings the better off you will be.
THE BOTTOM LINE IMPACT OF WRITE-OFFS
When your company writes-off an account, cash flow is affected, but so are sales and marketing. The “multiplier” impact on sales from bad account write-offs is shown in the following table:
For example, a cannabis business with a net profit of 2%, that experiences $100,000 in write-offs, you will require an additional $5,000,000 in sales to offset the lost profit on the $100,000 in write-offs. Or, if you have a net profit of 4% and write-off $250,000 in bad debts you need an additional $6,250,000 in sales to recoup the lost profit. This all supports the thought that if you want to be successful in collecting your money you need to act sooner rather than later with delinquent paying accounts.
WHY USE A COMMERCIAL COLLECTION AGENCY?
In the two and a half years that I have been involved in the cannabis industry I have spoken so many companies who have started to extend trade credit are experiencing customers who start paying slowly and some who have made partial payments and others who don’t pay at all. However, most are not yet not taking any outside action to help recovery what they are owed. They are either trying to manage it internally or using their corporate attorney to handle it.
The primary reason most companies in corporate America use a third-party collection agency is because their internal efforts to collect the debt, no matter how hard or long they have tired, have failed and management believes that the company’s resources are best spent making credit decisions, growing sales and managing good paying customers than wasting their personnel’s time chasing accounts that are not going to pay.
A commercial collection agency is the embodiment of “third-party psychology”. Once a third-party agency becomes involved your customer knows that you mean business and that the third-party will do whatever is necessary to collect the money due including employing legal remedies if necessary to collect the debt.
A collection agency, while representing your brand in the most professional manner, will not have any sympathy for the stall tactics and excuses employed by debtors. “Third-party psychology” will motivate your customer to pay because they want to avoid the additional costs and the potential embarrassment that comes with a prolonged collection effort and the possibility of litigation together with negative information provided to credit reporting agencies that may impact their ability to get credit in the future.
A commercial collection agency, especially one that understands the cannabis market, has resources, methods and techniques for collecting from your non-paying customers that are not available to the average company. In some cases, a full asset and liability search is required to understand the current financial situation of the debtor and their ability to pay the money owed.
In particular, an agency has the ability to access databases that may be needed to assist in identifying and locating (skip tracing) the responsible party related to the debt and in identifying and locating assets (asset search) that may be used to satisfying the debt.
State-of-the-art collection software is expensive but vital when pursuing delinquent debtors. Collection agencies today utilize software that merges all account information into a sophisticated database that can be used to coordinate all collection activity, i.e., telephone calls, call history and notes, follow-ups, promises, call-dialers, collection letters series, etc. to maximize the collection process while keeping costs down. The result is a complete record of all collection history and the ability to use this information to make better collection decisions.
The above is only some of the reasons a cannabis related company should use a commercial collection agency. There are also many more, but you get the point.
CONTINGENCY FEE STRUCTURE
Commercial collection agencies work on a contingency fee basis, meaning if they don’t collect what you are owed from your customer, you don’t pay them anything. Additionally, collection agencies can also add your collection fees to the past due balance (if your documents allow for it). If they are successful in collecting your principal plus the collection fees, you get back 100% of your money – you essentially paid nothing for their services. Also, the collectors that work at collection agencies are typically paid a salary plus commission. Just like a collection agency, they are paid for their performance on a contingency basis and are primarily motivated by the opportunity to make money, the more money they collect, the more commission they earn. At a good collection agency, their collectors should have a wealth of collection experience and be highly tenured. When you utilize a commercial collection agency, given the contingency nature of the business, they will exert every effort possible to collect the money due you because if they aren’t successful they don’t get paid!
As a company servicing the cannabis market and now extending trade credit, if you have past due customers the question should not be “if” you should employ the services of a commercial collection agency, it should be “when”. According to industry best practices, we say that the “when” should be if your customer is more than 60 days past due, they have not been responsive, they have not been trying to place new orders and they have broken multiple promises to pay you should send them to a collection agency.
Why? Because there is nothing more you can do and if you do not take swift action, the longer you hold onto it, the less collectable it becomes. The sooner you act the more likely you are to collect at least some of what you are owed. And as we showed, the multiplier effect of non-collection on your write-offs is significant. Timing is everything if you want to increase the probability of getting paid.
Sam Fensterstock is the senior vice president of business development at AG Adjustments, a provider of third party commercial collection services. Fensterstock has spent his entire business career as an entrepreneur and senior executive in the commercial credit and collection space. Has been a founder and played a key role in the dynamic growth of several leading niche commercial credit risk management companies and is considered an expert in the order to cash and credit and collection process.
Prior to joining AG Adjustments, Fensterstock was the director of business development at PredictiveMetrics a statistical-based credit and collection scoring and modeling company that he helped grow and sell to SunGard (FIS) in 2011. Fensterstock can be reached at [email protected] or 631-719-8096.
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