Question: We are discussing the role of the sales person in collecting bad paying accounts. We don’t want to turn the sales people into collection agents, but we do see a role for them. What are your thoughts?
Answer: This is one of those questions that come up regularly. It’s easy to see why. On one hand, you don’t want the sales people to be collection agents. Their time is better spent selling the product. Every collection call they make is one less sales call that could have been made.
On the other hand, if the bill isn’t paid, the sale isn’t really made. And you shouldn’t be paying commissions on invoices that aren’t paid within a reasonable period of time. So, the sales person has a vested interest in seeing to it that the customer pays the bill. Otherwise, the commission is forfeited.
So, what is a reasonable position that accounts for these conflicting pressures?
Let’s begin with a little economic analysis. Although many sales people don’t know this, you know the longer it takes an account to pay a bill, the less you make on it. The cost of money is a very real cost. Depending on the prime rate and the interest that you pay on your operating loans, in today’s economy, it could cost you as much as 1/2% per month of the balance. So, let’s imagine a $10,000 receivable, sold at 20% margin, which yields $2000 in gross margin. Now, let’s assume that the bill is paid 60 days late. So, you had to carry that $10,000 for two months. At 1/2% per month interest charges, it has cost you $100 in interest charges alone. Plus, you’ve probably had to create and send that invoice or an accompanying statement a couple of times, which costs you anywhere from $35 to $100 per invoice. Using a cost of $75 per invoice, that 60 day late payment has reduced your margin from $2000 to $1750. If your bottom line net profit before taxes is 3% of sales, you’ve made next to nothing on this transaction.
If you paid a sales commission based on the 20% margin, you have grossly overpaid.
Now let’s look at the economics from the sales person’s perspective. What does it cost you to have that sales person make a collection call instead of a sales call? We can calculate that. Let’s start out with an assumption of the sales person’s W-2, and assume that he/she will make $50,000 this year. Based on our studies of the actual cost of a sales person, we can say that it is likely that the sales person really costs you about 40% more than his/her gross wages. The 40 percent is composed of the cost to you for fringe benefits, taxes, expense reimbursements, cell phones, car allowances, etc. So that $50,000 sales person really cost you $70,000. Now, let’s assume that he makes an average of five sales calls a day, five days a week for 48 weeks. We are subtracting four weeks from the total to account for holidays, sick days, vacation, meetings, etc. Twenty-five calls times 48 weeks equals 1,200 total calls per year. Now divided into $70,000 equals a cost per call of $58.00. By the way, this is an extremely low cost per call. National surveys indicate average costs per sales call to be more like $180.
So, in our example, it costs you $58.00 to have a sales person make a live collection call on that account.
That certainly helps put things in perspective, and makes the conversation less subjective.
Let’s draw some observations from this exercise;
- It costs the company to allow an account to slow pay its bills.
- Often, the sales person is the best person to encourage the account to pay up.
- In our example, it costs the company $58 to have the sales person make a live collection. (Your number may be significantly more.)
Out of that, we can draw some principles:
- The sales people should not be the primary collector. That function is more appropriately done by the credit/collections department.
- When an account goes beyond terms in paying its bill, the sales person’s commission should be forfeited in some fair and parallel fashion. This aligns the sales person’s interests with the company’s interests.
- When the amount of past due is sufficient – so that the cost of carrying it is roughly equivalent to one sales call, the sales person should be expected to make the collection call.
Hope this sheds some light on the subject.