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Should salespeople be responsible for overdue receivables?

Matus Porubsky's Profile

Does your company sales team's KPIs include collection related metrics, or you leave dealing with overdue receivables to the collection department and credit risk prevention (and then salespeople's bonuses do not depend on payment discipline of their clients)? I have seen companies that used both approaches. What is your experience?

Answers

Topic Expert
Regis Quirin
Title: Director of Finance
Company: Gibney Anthony & Flaherty LLP
LinkedIn Profile
(Director of Finance, Gibney Anthony & Flaherty LLP) |

Prior to receiving a commission, the sales agent should comment on what steps have been taken to collect any amounts owed, aged over 90 days and what the client has stated about when payment could be expected. This approach ensures ongoing customer contact, as well as ensures that your sales agent will bring quality relationships.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

Having the salesperson involved in collections is a two-edged sword. On one hand, all clients should be cleared for credit by the Credit Manager. If so cleared, it is now the Companies (and Credit Manager's job to get paid). The Salesperson's job is to make sales.

Having the salesperson ask for money many times kills his chances of making that additional sale. The perception of the salesperson has changed from sales and how can I make you happy to collection agent.

However, regardless of whether the salesperson is or isn't responsible for collection, I put in all sales commission contracts that commissions are earned at time of collection of receivables, not before.

Topic Expert
Edward Abbati
Title: Vice President of Finance
Company: Location Labs
LinkedIn Profile
(Vice President of Finance, Location Labs) |

Pay their commission on the basis of when the cash is received and you will definitely find sales folks pushing to get the cash coming in. I worked for two companies that set their commission program based on cash collected and it worked!

Sara Voight
Title: Controller
Company: Critical Signal Technologies, Inc
(Controller, Critical Signal Technologies, Inc) |

Since credit will shut down someone's account who has exceeded credit limits and has overdue balances, you need your sales person to be involved without jeopardizing their relationship. At my prior employer, we gave our sales team the ability to step in and offer a one-time pass to continue services for a limited amount of time. (The sales person was only paid commission when payment was received, and it was limited to payment received within 120 days of due date.) The sales person then became the hero by allowing a little more wiggle room, "I'm going to override the credit department this time and allow your next order", and they could also get the conversation going with regards to getting payment in the door. We saw a lot more proactive conversations that were not sales/collections calls and our DSO dropped by double digits within a few months. The sales people then felt the positive impact of a quicker commission check when their clients paid timely.

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

I disagree with the sales person having the ability to override the credit department. Since credit lines/accounts are established (usually by a committee), any increase or "pass" should also be granted by whoever approved the account/line. At the very least, there should be a tier or levels of approvals (maybe according to amount and beside the sales person) in the sales division to be able to approve any further extension of credit or access to the account. This creates a hierarchy of the assumption of accountability.

I would also like to add to this thread that "sales" and "account management" are two different things and companies will do better with the latter. It creates a cradle to grave management of accounts.

In a banking perspective, there are levels of past due accounts and account managers are tasked to manage accounts until they are classified under "doubtful" or "uncollectible".....then the account is transferred to collections. Bonuses in banks are determined through a matrix where account performance (of the accounts they brought in) and account management are graded.

Lyle Newkirk
Title: CFO
Company: Corrigo Incorporated
(CFO, Corrigo Incorporated) |

I think you want your sales people selling and not doing the job of the AR people. The best sales people highly identify with the high of closing a deal and then expect and should get an immediate reward in the form of a good commission. And keep in mind that if your sales are not strong, a lot of other problems creep in.
But, you don't want them selling bad business. You can deal with this issue by putting into their commission plan a very simple sentence: "If the customer does not pay, for any reason, within 90 days of the invoice, your commission will be reversed." It is very important to say that you will reverse for any reason because salespeople will always be good at explaining why a problem is not their fault.

Anonymous
(CFO) |

If you want to stay in business, you want your sales people to do more than make the next sale. You want them to develop a long term, business relationship with solid clients. Involving them in the entire process, including collections, is a good way to drive this approach.

Otherwise, you'll end up with a bunch of commissioned hard sellers out there looking for their next 'mark' and repeat business will be minimal. That's a costly way of developing market share and leaves you vulnerable to the competition.

Anonymous User
Title: CFO
Company: Local Government Agency
(CFO, Local Government Agency) |

When I have CS issues with a vendor that become difficult to resolve, I pick up the phone and call my sales rep. That is the quickest and most efficient method I know of to take care of CS problems from billing to delivery to QC issues.

So, to answer the OP: Just reverse my approach here. Yes, it is a good idea to involve sales in collections.

Rino Patrick Unold
Title: Business Controller
Company: Fresenius Kabi
(Business Controller, Fresenius Kabi) |

I've seen too many cases where the billing/invoicing was decentralized (given to the "sales staff") leading to overstated Sales - leading to actual paid bonuses. So whether or not Sales personnel should worry about collections too is clear: They should. Maybe they are not to Collect money, but the approach mentioned by Wayne Spivak seems to be the only way to handle matters like this.
Pls. consider commissions earned over a longer period of time - over 12 Months. Some sales ppl. will argue they just signed a contract for x mill. but in real life the earnings are not truly earned until Mr. Cash has arrived. So my approach would be Phased Earnings combined with Cash received....

Tom Ruchalski
Title: CFO
Company: Skyline Windows
(CFO, Skyline Windows) |

The salesperson is the face to the client in my firm. Their compensation is completely based on fully billed and collected contracts. This has been a very effective position in my last 2 firms. It is common for construction firms to have DSO in the 120+ range. With the help of my sales organization I have an average of 60 days.
As the CFO I am used as leverage vs being the first line of defense.

Mark Matheny
Title: VP - FInancial Planning and Analysis
Company: Novolex (formerly Hilex Poly)
(VP - FInancial Planning and Analysis, Novolex (formerly Hilex Poly)) |

We have the sales team involved in collections and they understand completing the order to cash loop is their responsibility, but the finance/cash collection group is held accountable for the DSO/Percent Current as a KPI. Years ago I think there were some issues with linking commissions to collections for sales reps in some states. I was with another company then and it has been many years. Things may have changed.

Bob Low
Title: Principal
Company: Perron & Low
(Principal, Perron & Low) |

I've used different approaches to collections -- in some cases, we've escalated to the salesperson only after accounting department efforts haven't succeeded. Other times, we've made collections part of the salesperson's job escalating fairly quickly once routine reminders haven't succeeded. Much depends on the type of customer and the sales process. For example, with large customers and/or bigger ticket sales, the customer's accounts payable may be waiting on sign offs from executives and you need the salesperson to navigate those channels. When selling to smaller companies and/or generating on-going, recurring sales, your salesperson may be at the customer regularly and interfacing with someone who can authorize payment. In those cases, I think the salesperson should be more involved. In all cases, though, we've reduced commissions by uncollected or reserved balances.

The comments above raise some good issues. Involving salespeople can impact the relationship with the customer so that should be a consideration in deciding how and when to involve salespeople. However, they need to realize that no sale is complete without payment and ultimately they should play a role. There's also the question of paying commissions on collection or recognized revenue -- great if you can pay based on cash received but also expect some resistance to that.

Anonymous
(Board Advisor and Investor) |

At larger companies, there is a need for some specialization and focus, segregation of duties, etc. However, it is a group effort, requiring some sales input and ownership at various touch points. So, I'm used to seeing sales commissions based on recognized revenue. Revenue rec is impacted by the SAB104 criteria and other accounting pronouncements, which pull in various company functions. If the customer account does not have proper credit set up and terms (sales people help with gathering some of the documents), does not have a contract/sales terms in place (sales people help again), and collect-ability of the A/R (sales people are front line communication to customer on Sales Order process) is not established, then no revenue rec and no sales commission. I've seen sales staff who have become as good at evaluating revenue recognition as accounting managers !

Anonymous
(Co-CEO) |

I would prefer a compromise. Pay half the commission on the sale and half at the collection. As was stated, a salesperson is to focus on sales. Every single thing that distracts a salesperson from selling lowers the number of sales they can make. Every sale they cannot make due to distractions is one less sale to keep the company successful.

Why is it that companies think that because a salesperson has down time where they are not "selling" that they can give them the task of doing paperwork?

A long time ago, I sold cars. Incredibly, nearly every person who talked with me when the conversation went past, "I'm just looking," was someone who I got interested and we sat down to start the paperwork. Countless times, halfway through the paperwork, people looked at their watches and said,"Look, we gotta go," and I lost the sale.

I DIDN'T BECOME A SALESMAN TO DO PAPERWORK!

When I sold carpet, I could sell carpet like nobody's business! But, it had paperwork! First, you had to calculate the square footage and convert that to carpet length. Then we had the credit application, then we had to schedule the install, and then follow up with the supplier to make sure the carpet came in, then make sure the installer was on time and the buyer was there. It was a pain in the butt!

Let me find a person in need and convince them to get it from me, and have someone else do the paperwork. Sure, I will take a lower commission to cover the cost of the additional employee. But, I know the less non-sales work I have to do, the more sales I will make.

And the more sales I make, the more sales I make. Every salesperson who knows anything knows that the second sales, after the first sales are way easier. If you make a salesperson stop from making sales to do nonsales stuff, the longer that time is, the more that second sale will go back to being the first sale.

I better get off my soapbox before it breaks.

Shaan Bose
Title: Unemployed
Company: Unemployed
(Unemployed, Unemployed) |

Commissions should be based on cash receipts when possible. I think it's totally fine for salespeople to be involved because many times it's the relationship that they have that can help in the collection process.

Robert Islas
Title: Controller
Company: Crossroads Diversified Services, Inc.
(Controller, Crossroads Diversified Services, Inc.) |

I agree that sales persons should be involved, in addition other field employees that support our sales persons/branches are involved with collections. They are on the front line and deal with the clients on a weekly if not daily basis, and have developed relationships with the clients.

Len Green
Title: Performance Improvement Consultant and E..
Company: Haygarth Consulting LLC
LinkedIn Profile
(Performance Improvement Consultant and ERP Strategist, Haygarth Consulting LLC) |

Sales people will behave the way that maximizes their variable comp. What behavior does the variable comp need to influence?
I'd first look at the root causes for overdue AR before proposing a plan.
Customers normally don't pay for any/all of these three overarching reasons:
1. Your company did not deliver what was expected (that expectation starts with what the sales person led them to believe; it ends with what the customer sees as value delivered-goods or services)
2. Your company fouled up the paperwork (did the sales order/invoice reflect the actual deal? did you submit your invoice as required by the customer?)
3. The customer has no money (they ran into trouble, or you gave them too much credit?)

Find the root causes for overdue AR, then develop changes to your processes so that you know where your sales team is involved, where they are responsible, in the quote to cash cycle. Then design a comp plan that fits your company objectives for them.

Topic Expert
Scott MacDonald
Title: President/Owner
Company: AlphaMac Resources, Inc.
(President/Owner, AlphaMac Resources, Inc.) |

Please see my training at https://www.proformative.com/courses/commercial-credit-training.

Sales people should be aware of their accounts and their payment status. Additionally, in accounts less than 30 days past due, the sales person can certainly inquire if there is a problem with the order or delivery of the order. This is seen more as customer service than actual collections activity.

But at a certain point, say 30 to 60 days past due, the collection effort needs to be done by professional collections people.. Sales people and accounting department staff ARE NOT collectors. I have never seen an accountant or sales person who has the personality or skills to do true collections type work. Collectors are simply a different breed of cat.

Sales people should be paid on collected accounts, not before. Sales people can do a lot to help qualify an account properly. If you pay them on all sales, then their priorities are not properly aligned with the ultimate goal of the company which is to bring in cash.

I agree with an earlier poster, there are two reason a customer hasn't paid.
They can't or they won't. Your sales person might be able to help gather information, but they shouldn't be involved in the actual negotiations.

Mike Pingree
Title: Staff Accountant
Company: Global Food Ingredient Co
(Staff Accountant, Global Food Ingredient Co) |

"Sales people and accounting department staff ARE NOT collectors. I have never seen an accountant or sales person who has the personality or skills to do true collections type work. Collectors are simply a different breed of cat."

We need to meet sometime. I am both a staff accountant and in charge of collections. Must be that psychology degree of mine that makes the collections side work. LOL.

Ern Miller
Title: Co-CEO
Company: Miller Small Business Solutions
(Co-CEO, Miller Small Business Solutions) |

Michael Pingree, you are the exception to the rule for collections and sales. Well, as far as expertise goes. Usually, a good salesperson becomes a good collector through necessity. A REALLY good sales person knows that every moment they spend in collection paperwork, is a moment they could be increasing sales.

Topic Expert
Scott MacDonald
Title: President/Owner
Company: AlphaMac Resources, Inc.
(President/Owner, AlphaMac Resources, Inc.) |

Michael, sorry if I insulted you. If we did meet then I might be able to say I have only met 1 accountant that has the personality and skills to do collections. But I would recommend that you spend a day watching a professional full time collector and see if you come away with the thought that you indeed have the same personality and skill set. You might be surprised. :)

Craig Levy
Title: Financial Consultant
Company: Craig Levy
LinkedIn Profile
(Financial Consultant, Craig Levy) |

It depends on the situation. In the industries I have been in - it's not a credit or cash flow problem. We were selling to some of the largest well funded companies in the world. So if it's not cash what is it?

An expectation gap between what was promised / sold and what is being delivered.

Getting the sales team involved in collections is a two edged sword. In short I would say the reps involvement is cursory if a a service level agreement (SLA) is in place and the company is meeting the terms. If there is some level of dissatisfaction, the long-term owner of the relationship should know and be able to navigate. If that's the sales rep - then get them involved. However, is these types of situations the sales rep is not the one that has the current relationship.

The other case is if the sales rep sold something beyond his company's capacity. If the company was fully informed of the deal and the stretch it would need to make - then the sales rep again is only involved in a limited basis. However, if the sales rep went "outside their authority" with out approval - then yes the sales reps should be involved.

Compensation is an entirely different beast. I tend to like "collected gross margin" However, depending on the operating systems in place this may be difficult to get.

Matus Porubsky
Title: Financial Director
Company: NMS s.r.o.
(Financial Director, NMS s.r.o.) |

Thank you All for your thoughts and responses. The most preferred solution among you, judging on the comments, seems to be paying sales reps upon collection or a variation of such rule (pay x % on sale and x % on collection for example).

I agree that sales rep compensation must be aligned with not just making the sale but also getting the cash, and they should assist with the collection process appropriately.

On the other hand, the comment that sales reps and accounting dept staff are not the best in collection process is very true, the collection calls require different set of skills. Moreover, having someone from collection dept chasing the receivable and playing hardball allows the sales reps maintain a friendly image with their clients.

Last, existence of sound credit rules and know your client check procedures is another tool to reduce the credit risk, effectively saying to sales reps "these clients are safe to do business with for the next 6 or 12 months" and making the collection dept make sure the sales reps don't make business with risky clients.

Thanks again for useful tips.

John Donovan
Title: Global BPM Consultant
Company: Arvato Finance
(Global BPM Consultant, Arvato Finance) |

Matus,

I have spent my career in F100 organizations and seen most of the solutions mentioned above come into play.

How and when people are compensated drives behavior and the level of cooperation within the organization. If there is an equal emphasis on Sales, Revenue and Free Cash flow you have a winning combination.

For example, if you offer the sale org an increased compensation for cash with order, revenue is recognized immediately, cash flow improves and back office administrative fees go down. You would be surprised to see how effective a collector a sale rep can be when they get paid for cash with order.

John

Stephen Glenn
Title: Controller
Company: Pierre Frey, Inc.
(Controller, Pierre Frey, Inc.) |

A question for anyone who believes the sales rep should not be involved in collections, do you continue to make sales to the customer after you have turned the account over to collections? How much commission can a sales rep earn if there are no further sales?

Sales wants to continue making sales, and as anonymous/prior salesperson stated, it is much easier to make the second sale. In my experience sales reps want to be involved to help save the account. This is after all efforts of in house requests for payment have been exhausted, and before heavy collection efforts begin, the point the account is closed and no further sales can be made.

Anonymous
(Co-CEO) |

The AR manager should make a judgment call on this. This should be part of an agreement between the AR manager and Sales Manager.

For example: Permanent Kaiser Roll company makes an order for 100 computers (estimated value: $100,000). The salesperson is expecting $5,000 in commission.

Usually, a salesperson gets paid before the net30 comes due.

PKR doesn't pay in the net30. They are contacted, and claim paperwork foul up.

Net 60 passes. The AR manager decides no more sales to PKR until this is resolved. He conveys the situation with the Sales Manager, who agrees and informs the salesperson.

The salesperson, anxious to keep a sales train going might decide to approach PKR to get it resolved.

In that example, the real life situation, two things happened. The salesperson was about to lose their commission and it would have been taken from their pay balance...something they could not afford. They interfered and delayed the resolution because the AR department were about to come to a deal, until pressure from the receiver of the computers put pressure on their AP department. The AP took offense and the whole thing ended in shambles and a court room.

How it should have been handled (in my opinion):
The sales rep did their job (and no, it wasn't me...I was not affected directly, except from then on, I took steps to make sure sales went through; that it slowed my sales per day ratio...not a good thing), they did the work and should be paid, so long as someone approves the sale (the sales manager or AR manager), after considering the amount of the sale and the ability of the client to pay. If anything, the person who made that decision should be responsible for the commission if they client did not pay. (A salesperson makes $75K versus $150K of a Sales/AR manager.)

Summary:
1. Pay the sales rep their commission.
2. Let AR work on getting the company's money.
3. Until the whole thing is resolved, hold off providing anything else to the client.
4. Make the AR Manager responsible for doing his job, not the sales rep.

Anonymous
(Senior Financial Analyst) |

I'm curious as to how you have seen this process managed on the systems side. Should the back-office ERP system link with Salesforce (or CRM) to give sales reps up to date information about customer payment history and credit limits? Or is this something that comes into consideration only once there is a PO? With accounts moving from rep to rep and other factors, how do you make sure that sales is aware of a past payment issue or the ability of the customer to pay?

Len Green
Title: Performance Improvement Consultant and E..
Company: Haygarth Consulting LLC
LinkedIn Profile
(Performance Improvement Consultant and ERP Strategist, Haygarth Consulting LLC) |

Anon
Great question, why not use systems to provide automated, integrated info?

Depending on your needs (e.g. is there a high rate of credit holds on orders, are some customers habitually bad, or is it merely informational, so the sales rep does not go into a call/visit ignorant of operational issues?), you can implement one or more of the following:

EXCEPTION ALERTS
When a customer credit limit (open AR plus new orders) reaches 90% of credit limit or goes over credit, trigger an email alert to the sales rep and credit manager. They can then take action and decide whether to manually release the order.

WORKFLOW CONTROLS
When a new sales order will push a customer beyond their credit limit (or beyond 105% of their limit), accept the order with a "credit hold" status and route it to the credit manager for review and release or continued hold.

UPDATE CRM ACCOUNT
Display customer order, invoice and AR metrics on the sales rep's home page (you can limit display just to exceptions, not all accounts).

CUSTOMER PORTAL
Provide similar overdue/exception data so customers can see order and invoice history and status, including past due.

Hope that helps.

Randall Bolten
Title: CEO
Company: Lucidity
LinkedIn Profile
(CEO, Lucidity) |

Wayne Spivak had it right from the start – it’s a two-edged sword. Obviously, holding sales people responsible for collections – presumably by tying commissions to collections in some way – WILL shorten A/R days. The question is how much will they get shortened, and at what price in terms of how salespeople spend their time and how the practice affects the relationship between salespeople and customers. The answer will differ from company to company, but depends on factors like how effective sales reps are likely to be at collections in that company’s environment, how big a problem collections really are, and how structured the company’s back-office collections efforts are.

Moreover, there are gradations in the degree of involvement you can require of salespeople as implied by their compensation, including (in descending order of fierceness):
• No commission even earned until cash is collected
• Commission EARNED at some earlier tangible event, like invoicing or booking, but not PAID until cash is collected
• A PORTION, like 50%, is not paid (or perhaps even not earned) until cash is collected
• Commissions not tied to collections, but if a receivable reaches a certain age or gets written off, the commission originally earned on that business is netted against future commissions earned until it’s all clawed back.
• Independent of the above, you can make a portion of the salespeople’s target compensation a collections bonus, tied to how quickly his/her receivable are collected.
• Collections has no compensation implications.

The idea that there is a single right approach for all companies is just narrow-minded.

Anonymous
(C2C Specialist) |

I've worked for several organizations and in my experience this varies by the size of the firm. For larger firms, generally no, for smaller companies, yes.

For larger firms the sales person was just one person who was involved with on boarding customers. For smaller organizations the sales people were more involved. Larger organizations have marketing department and other support people. In smaller organizations the sales person usually handles it all.

For the smaller organizations we had a claw back on commissions and if we didn't collect then it would count against their commission. Any commission earned on the deal would be reversed.

Anders Liu-Lindberg
Title: Regional Finance Business Partner
Company: Maersk Line Northern Europe
LinkedIn Profile
(Regional Finance Business Partner, Maersk Line Northern Europe) |

Sales people should be responsible for selling and not the aftermath of selling. The company, however, should have a view on what's good business and bad business. In the direction setting to Sales customer who don't pay on time or not all should be deselected over time.

A sales person's core competency is selling and not managing the customer end-to-end. That's what we have customer service and finance for.

Bradford Marcus
Title: BDO/Account Executive
Company: Atwell Companies, The
(BDO/Account Executive, Atwell Companies, The) |

A sales person should only make one call or visit about a past due invoice. They should not be aggressive but firm. Any additional efforts by the salesperson will have the buyer/client look to avoid all future calls and contacts and negatively affect the relationship.

Anonymous
(VP Finance) |

Definitely not. You want your sales reps focused on closing new business. Let the AR team manage delinquent accounts.

David Gross
Title: President
Company: Solken
LinkedIn Profile
(President, Solken) |

I would add that it is completely dependent upon the type of service/product your company offers. For "hit and run" type (one sale, move on to the next) products then no. For "ongoing" (relationship sale/repeat business) then yes, to an extent.

If a sales person is churning and burning then they have no business, or inclination, to chase past dues. Nor would they be able to offer accounting any valuable intel.

If the rep is visiting often and selling products that require their presence then, at the very least, they should know the situation so they can act accordingly and adjust their forecasts and at most gather intel for accounting. They are the eyes and ears in the field and can at least engage their customers to determine if business is going well or if there are disputes they can intervene with.

As for making actual collection calls, the answer is, in my opinion, situational. Sometimes a rep has multiple contacts and champions within the organization that they can tap for intel and other times they are on thin ice to begin with. I have had customers that I could look right at them and tell them (whether true or not is irrelevant) that accounting is all over me about the bill and I need to tell them something. I have had other customers that are so elusive or squirrelly that I didn't feel comfortable asking them for the bathroom key.

ArLyne Diamond
Title: Owner - President
Company: Diamond Associates
LinkedIn Profile
(Owner - President, Diamond Associates) |

In my early working career, I was in credit and collections - for a blouse manufacturer and later for a huge international sales organization for hospital and medical supplies. It was my responsibility to let the sales force know when we had problems with a customer. It was then their responsibility to either fix the problem since they had the relationship with the customer - or stop selling that customer.

The person most closely connected to the customer may be either the best - or the worst - person to try to resolve a past-due balance situation. If the sales person thinks he or she can do it - I'd let them. If, on the other hand, as is so often the case, they want to remain the "good guy" and allow someone from the credit dept. to be "the bad guy" - I'd say that is where the responsibility should lie.

If, on the other hand, a sales person continues to sell after being informed that the customer was not to be given any additional credit - than it should be the responsibility of the sales person.

Hope this helps

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