Collecting payments on invoices on time is critical for a company’s performance. Companies can be profitable on the books but if they are unable to collect their payments on time they run the risk of running out of cash severely hindering their business operations. Without collecting cash from their customers on time companies are unable to pay their vendors and employees on time which can cause serious loss of morale and company reputation in the marketplace.
One of the top areas that CFOs monitor are their Accounts Receivable and how well the company is collecting on payments. Many industries already have long payment terms on their invoices upto 120 or even 180 days from the invoice date. Collecting late payments becomes very critical in such industries to keep your cash cycle running smoothly. Cash is like blood flow in an organization. If it stops or even slows down, it can cause serious problems.
There are several measures that companies use to collect quicker on their payments. Some provide early payment discounts encouraging customers to pay earlier for a discount on their invoice. On the other hand, some companies enforce late payment penalties for invoices paid late by customers. This however is not enforceable unless your organization has considerable power in the industry. Some companies sell their Accounts Receivables to professional collection companies at a discount so that they can have cash upfront while the professional companies take the hassle of collecting from their customers.
Internally companies tend to have full collection teams to follow up with customers on time and improve the efficiency of collections. Introducing collection metrics to your incentive plan is a technique that can be very effective if used appropriately.
Should Collections be a part of the Incentive plan?
When thinking about designing an Incentive plan, there are already a lot of factors that one needs to consider. The sales team represents any company or organization, as they are the ones who interact with the customers and general audience. Being the face of the company, many companies do choose to put the responsibility of collections on the sales team.
Here are some of the scenarios in which adding collections to your sales team’s incentive plan may be a good idea. If your customers need to be constantly reminded about payment of invoices, then it might be a good idea to include collections in the incentive plan as salespeople are the interface with those customers and can follow up with them on a regular basis.
Irregular payments post the due date on the invoice are also a sign for you to include collections in the incentive plan. The sales team has a strong impact on brand reputation, increases revenue, maintains long-term relationships with customers, and helps in overall business growth. Thus, it makes sense to include collections in your incentive plan after considering a few factors.
Industries that have long payment terms (120, 180 days or more) are good candidates to have collections metrics on sales team incentives. Even incrementally better collections can cause wonders to the company’s cash flow hence adding that extra incentive to salespeople would be totally worth it. However, if collections are automated through credit cards or prepaid modes then it’s better to avoid adding more complexity to your sales incentive plans.
Including collection metrics into incentives, however, can be challenging because they tend to be complex to calculate and have to be tracked over a longer period of time. Invoice payment terms tend to cross multiple quarters hence accurate calculations and crisp, clear communication to your sales teams as to their priorities in terms of collections is critical. Luckily, that’s exactly what Incentivate excels at. All the complexity in the calculation is automated away and both admins and sales reps get to see exactly what they’ve done and what they’re expected to do to earn incentives.
There are multiple ways you can introduce collections Metrics into your Incentive plan. We will talk about them in our future blogs. Healthy collections culture in a company is excellent for its cash flow situation and introducing collections metrics into incentives can improve collection health.