When receivables are significant, there may be a dedicated collections person who is paid a salary regardless of how much bad debt is recovered. Many commercial collection agencies are paid only when they collect, so companies using collection agencies can often save the expense of salaried employees.
One way companies manage cash flow is by holding payables as long as possible. Every company has a philosophy, if not an actual written policy, about when to pay their bills. Sometimes the philosophy dictates that bills are not paid until creditors demand payment in terms stronger than a monthly invoice. A letter or a call from a collection agency is often the trigger for a check to be released.
Retaining existing customers is generally much less expensive than acquiring new ones. By hiring collection agencies, companies distance themselves from the role of bad cop when existing clients are reluctant to pay. The first notice from a collection agency may be enough to spur the customer into action while allowing the relationship between the parties to remain cordial or neutral.
In some companies; salespeople do not receive their full commissions until all monies are
received from clients, thus forcing salespeople to spend at least some of their time working in an accounting function. Not only can this lead to confusion and deterioration of relations with clients, but the unfortunate outcome of this practice is that every minute spent collecting is a minute spent not generating future revenue.
The accounts receivables staff is often tasked with collecting aging receivables. These people usually have other responsibilities and may naturally put off doing collection work simply because it is not anyone’s favorite task. Since the longer a debt remains unpaid, the less likely it is ever to be collected, delay in collecting can be costly. Commercial collection agencies understand this principal and are motivated by their business models to collect sooner rather than later, recovering money that otherwise might be gone forever.