I’ve never believed receivables collections is just an accounting task. Cleaning up receivables, instead, is an organizational goal and yes, sales needs to be involved.
I teach my clients that cash is oxygen in their businesses as it gives them life. And that means the AR collection process is one of the most if not the most critical part of an organization’s cash flow process. The way to drive this issue home is emphasizing average Days Sales Outstanding (DSO) on their weekly flash reports. We also include DSO in the monthly financial metrics.
I continually communicate and educate the sales groups of the clients I serve about the impact of sales on working capital. I help them to understand the sales cycle isn’t complete until the cash is collected.
Therefore, depending on the business and industry, I encourage most of my clients not to pay sales commissions until an invoice is collected and to charge back any commission on uncollected invoices (should the commission be paid before the cash is collected).
This is often a difficult pill to swallow for most sales organizations. However, it’s much easier to implement when the sales team understands working capital and the impact it has on their organization.
Radical thinking? Not at all. I asked three partners their take on this issue. Here are their comments.
San Francisco, CA
“Sales staff must be empowered and incentivized to see the sales process all the way through to collection. Yes, that means that commissions are not earned and payable until the money is in the bank. Once sales personnel are compensated via a collections-based commission structure, the organization is appropriately positioned to make collection issues, and possibly cash flow issues, a thing of the past. You will then see your sales staff risking an awkward moment with slow-paying customers, truly making them the world’s most interesting men and women.”
“In most companies, the collection of AR is relegated to the bean-counters in the accounting or AR departments. Have these bean-counters ever mastered personal relationships – even one? Likely not. Who has mastered personal relationships? The men and women in the sales department. And why should it be pushed down to the top sales producer? Because they have the personal relationships with the customers, are known to them, can walk right in, and get their phone calls, emails or messages answered.”
“Grant, as you know, I’m a contrarian in any matter of finance. Accordingly, we’re not asking the right question. The appropriate question is, ‘Why does our aging look like a train wreck to begin with?’. I help my clients build the proper systems and processes first to help eliminate past-dues. Then in those cases where we have problem customers paying late, we look at who has the best relationship to collect the cash. In some cases, it’s personnel in the finance group. In other cases, especially with new customers, I look to sales team members. I also can’t emphasize how important it is for the sales team to clearly articulate the payment process when landing that new customer.”