Accounting Best Practices, Fifth Edition

8–8. Pay Commissions Only from Cash Received

A major problem for the collections staff is salespeople who indiscriminately sell any amount of product or service to customers, regardless of the ability of those customers to pay. When this happens, the salesperson is focusing only on the commission that will result from the sale and not on the excessive work required of the collections staff to bring in the payment from the supplier, not to mention the much higher bad debt allowance needed to offset uncollectible accounts.

The solution is to change the commission system so that salespeople are paid a commission only on the cash received from customers. This change will instantly turn the entire sales force into a secondary collection agency, since they will be very interested in bringing in cash on time. They will also be more concerned about the creditworthiness of their customers, since they will spend less time selling to customers that have little realistic chance of paying.

There are a few problems that make this a tough best practice to adopt. First, as it requires salespeople to wait longer before they are paid a commission, they are markedly unwilling to change to this new system. Second, the amount they are paid will be somewhat smaller than what they are used to receiving, since inevitably there will be a few accounts receivable that will never be collected. Third, because of the first two issues, some of the sales staff will feel slighted and will probably leave the company ...