Updated: Sep 30
Your accounts receivable is an important asset which is YOUR money…and no one cares about your money the way you do.
Depending on the size of your company, you may or may not have someone on staff who manages or collects on your accounts receivable. If you do, be sure you have strict guidelines on who can and cannot write off a receivable as uncollectible. Because “writing off” throws your money out the window. Granted, things do happen in business, like bankruptcy or the close of a business, that makes a receivable truly uncollectible. But while in operation, you need to be aware and maintain control over your accounts receivable to the best of your ability. It’s good practice to personally go over your outstanding receivables monthly with your staff just to be aware of the activity. Collections commission plans can be very effective in focusing your staff. Just be careful that they are structured so that they have more than one benchmark against which they are being evaluated. For more information, go to my website at www.j0r9008u.com to download a free white paper on the most effective accounts receivable commission plans. You will find it in the free resources section.
A collections commission plan motivates your collector to do what is one of the most difficult jobs in the office environment. When your collector calls a delinquent customer, the customer may not be happy for the call and may become belligerent. For your collector, knowing that his or her efforts provide additional income can make these calls more palatable.
However, you must carefully structure the plan so that you aren’t being taken advantage of. Early in my career, I was hired to run the business office in a small local television station. It was my first assignment which put me in charge of every aspect of the accounting department. The first thing I did was diligently reviewed all the accounting reports to see how we were doing. When I got to the accounts receivable aging report, I was very impressed to see that our Days Sales Outstanding (DSOs)₁ were fewer than thirty days and our outstanding receivables over ninety days were less than ten percent. Wow, this was great! However, I failed to look at the high bad debt expense in conjunction with the reports. It turns out that the collections person was being compensated solely on DSOs and percent receivables over ninety. BUT she also had the authority to write off accounts that she deemed uncollectible. I quickly realized that she was playing the system. A system that had been rigged in her favor. I easily fixed the problem by putting in a system of controls over account write-offs. Unfortunately, our collections clerk saw a noticeable drop in her income and soon I was searching for a replacement.