Should Salespeople Play a Role in Collecting Customer Debts?

by Dave Kahle

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?

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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 ... READ THE ORIGINAL ARTICLE HERE.

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