Collection metrics help assess your company’s effectiveness in collecting cash from customer payments within a specific timeframe. Collecting payments on invoices on time is critical for a company’s performance. Moreover, Key performance indicators (KPIs) play a pervasive and crucial role in the collections field as they are essential for assessing recovery on receivables. These metrics are employed to evaluate the extent to which an organization or employee achieves specific performance goals.
Companies can be profitable on the books, but if they cannot 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 a serious loss of morale and company reputation in the marketplace.
One of the top areas CFOs monitor is their Accounts Receivable and how well the company collects payments. Many industries already have long payment terms on their invoices, up to 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 to have the cash up front, while 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 choose to put the responsibility of collections on the sales team.
Here are some scenarios in which adding collections to your sales team’s incentive plan may be a good idea. Suppose your customers need a constant reminder about the payment of invoices. In that case, 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 regularly.
Irregular payments past the due date on the invoice are also a sign for you to include collections in the incentive plan. The sales team strongly impacts brand reputation, increases revenue, maintains long-term customer relationships, and helps overall business growth. Thus, it makes sense to include collections in your incentive plan after considering a few factors.
Industries with long payment terms (120, 180 days or more) are good candidates for 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 worth it. However, if collections are automated through credit cards or prepaid modes, avoiding adding more complexity to your sales incentive plans is better.
Calculating and tracking collection metrics over a longer period can pose challenges when incorporating them into incentives due to their complexity. 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 are 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 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.