I am looking to get a sense for industry practices around incentivizing AR staff to improve collections. Do you or don't you incentivize AR staff above and beyond their normal pay. If so, what measures to you use to determine the incentive, and how do you continue to raise the bar?
As a point of reference, I work in the mental healthcare industry, so receivables are typically due from Medicare, medicaid, insurance, and client self pay.
Cindy
Great question, and the answers could be diverse.
I found as a finance leader that I could categorize non payment of invoices into 3 categories:
1. You did not deliver what you were supposed to deliver (in terms of services and expectations of value)
2. You did not submit proper paperwork to get paid (i.e. billing data was wrong,or it was incomplete or late or sent to the wrong address)
3. They had no money in the first place.
What can your AR collections team control?
What can they identify as root causes?
For example:
1. Collections can be proactive on follow up of overdue payments-early detection of issues..are their first calls and follow ups well timed? Do they focus on big amounts first?
2. If collections discover that the reason for delay is bad paperwork or incorrect pricing or incomprehensible bills, do you reward them for identifying solutions? Perhaps the root cause is a billing form/invoice that is too hard to understand and that is a pricing issue or a billing issue that is upstream.
Often collection problems are to do with factors outside the control of collections staff-after all, if customers pay on time, there is no need to "fix a problem."
Regards
Len
2
Cindi,
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Len,
Great points, and these agree with my experience. In addition to these I would add:
4. Customer Granted Extended Terms in order to meet end of month/quarter/year revenue goals. A DSO goal would be of little use as this is out of A/R's control.
The best incentive I have ever used, and it had the full backing of the CEO, is to pay Sales Commissions and
Lastly, the other thing I do is give each A/R collector the ability to do something special for their A/P counter part at the Customer; e.g. flowers on birthday, dinner coupon on anniversary, etc. The relationship between Seller A/R and Buyer A/P departments aren't that dissimilar from the relationship of Seller's Sales Team and Buyer's Purchasing Department. In the end I have found it is these relationships that actually increased (or decreased) the speed of collections - provided the Customer isn't part of Category 3 above: no money.
I judge my collectors on their relationships with Customers, more than collections.
Cindy,
I have found the best incentive to be DSO reduction. Set the bar at current DSO and give incentives at DSO reduction levels ( example-0.5 days-3.0)-incentive increases with larger reduction.
Incentives can be a team approach, empowerment of the fine job that the person or team is doing in reducing A/R collection days; comparison with industry norms and how well they are doing.
In these times of tight finances, not only is collection of A/R in a timely fashion important, but so is all the dollars collected.
Wayne Spivak
SBA * Consulting LTD
I have used AR>60 days. I have multiple collections personnel and give individual incentive for thier assigned accounts and if total AR<60 meets overall goal and each meet thier personal goal the incentive for that month is doubled. I have also incentivised the successful "identification, solution recomendation, and implementation of corrective action" by not only Collections employees but all
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What are you using as the reward? A bonus? A raise? A pat on the back? I want my staff to get to the 98% < 60!!!! Please tell me! How long did it take to work and are you having any other issues (billing issues, etc.).
The incentive we used for the AR < 60 was a $50/ month bonus per person. The double I mentioned would obvioube $sly be 100. We offered $200 bonus for implemented process improvements. Each of the collectors works with certain customer service / sales folks. I also have lunch catered in for the collections person and thier customer service team if they meet thier AR goal. This does two things - it helps get CS/Sales involved in the collections process and they start putting pressur on the Collections people becasue they want thier lunch! It took about 18 months to get it to the point where it is now, but we saw immediate improvements. Hope that answers your question.
Thank you David. Money usually talks..good ideas..thanks for sharing.
In follow up to Len Green's sound advice, I would understand what the best possible/practical DSO is for the customer base and, particularly, each collector's portfolio. We all know how difficult government payments are esp. if there is any paperwork problem. I would convert DSO targets into cash collection targets and then drill down to portfolio levels. I would assume a user friendly dispute mgt. process is in place and thus segment unencumbered A/R accounts from disputed balances so the accountability is clear. Link cash collection targets overall drilled down to there is a individual commitment level. Collection call targets must be made by portfolio and size of balances to justify the collection staffing with realistic calling volumes. I have prepared a collection intensity matrix to support an overall collection target using portfolio segmentation as the driving force. I would be willing to share same with interested professionals. Setting compensaton incentives must incorporate contact goals and collection effectiveness translated into DSO reductions by portfolio ownership. Make it meaningful related to the cash flow improvement and your cost of capital. Make it medium term so as to avoid short term in nature. Involve non-finance owners if disputes are identified as a major collection impediment. Motivate the staff with realistic cash targets and continue measuring collection activities and individual performance goals.
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Robert, I like your structured approach to this challenge. Could you share with me? Your profile doesn't allow private messages so I'm posting here in hopes that you will see and respond directly.
JSchwartz56 AT comcast DOT net
Love your structured approach also...can you please share the matrix with me? Thanks so much.
Robert-
I would love to see an example of your matrix. Please can you share with me?
I'm in health care(ASC) industry. We have government payers like Medicare and Medicaid, but also private insurance payers. I set the cash collection goals as realistically as possible reviewing the aging reports and involving the AR staff (Billers and collectors). The staff's input is vital in setting the realistic goal - be it a problem with a payer or the lag time in sending claims from the date of service. The staff are incentivised once the cash collections targets are met using non monetary approaches like going to a bowling place on a friday (we've a small business office in this region) once a quarter or in a shorter time than that if the goals are consecutively met for 3 months.
Thank you!
Due to the nature of our business we have a mix of Government, General Contractor and Small Size Businesses which we are collecting on. Needless to say many pay as agreed and others we know are at time of job completion, etc... In setting up incentive programs for my A/R Staff, I base is on Cash Flow needed to sustain or business. I track our daily, monthly, annual intake of Cash from receivables and set monthly goals of cash that must be collected for the month. They work towards a daily average knowing that if one day is low they really need to step up the pace to get their average back on track. If they hit the goal for the month they are rewarded with a set dollar figure (example $500), if they exceed the goal then they would be rewarded in larger increments. I have found they are motivated by hitting a daily number and it motivates them to make more calls. It's easy to put into place and the company is only paying out incentives as the cash flow is created for the business.
If you have an AR staff it should be their job to get the best possible collections and to manage AR as well as possible. Whoever directly supervises the function should also consider AR excellence as a core part of their job.
Having said that, if you feel you have to have an incentive I recommend DSO targets. After all, if an outsider looked at your company and wanted to access AR quality, that is what they would look at.
Instead of incentives, document collection goals and track progress daily/weekly on a Production Board directly outside of their cubicles/offices. Having visible goals and progress is a huge driver of results. We use ~2' x 4' dry eraser boards and have a section for weekly collection updates and a section for the past 6 months collection % vs. goal (e.g. 95% or 105%) for everyone to see. These goals and tracking can be in total or by individual.
Our collections personnel, as is the case with every employee, are on the same incentive program which is cash flow driven. The AR team has a strong incentive to get the cash in.
I handled AR in both Manufacturing and Service companies for 30 years. I found the best way to collect receivables is to be knowledgeable about your customer and proactive in the collection process. I found the people that are willing to dig into the detail and treat people in a respectful manner. The incentive I have successfully used is recognition and an increase in responsibility.
Just so I get a sense on DSO targets - this would be affected by business sales. So, if business growth is rapid or in decline, DSO would be unnaturally affected by things outside their control.
How do you solve for that?
These are all great suggestions, these incentive ideas for achieving AR/Collection/Credit department and company goals and metrics. Among them, the ones that I would put at the top of the list are financial rewards (example given was AR<60, $50) to all department staff involved in “closing” transactions, to begin with. And then, as suggested, lunch with CS/Sales,
Hello.
If you are struggling with A/R collections, I would consider some additional factors in the entire process:
CREDIT/BACKGROUND CHECKS
(1) Are credit/background checks on customers being performed prior to entering into business with a customer. You would be surprised what you can learn from simple online searches. There are services out there that will perform vendor checks for $75/name. This may seem like a lot, however, the aggravation that you save on the backend is more than worth the cost.
INCENTIVIZING SALES PERSONNEL
(2) Do sales personnel not receive commission until the sales are actually collected? I've found that if a sales person does not get paid (or has his pay reduced) until a receivable is collected by the company, the salesperson will be greatly incentivized to help the accounting department collect the money and therefore not have their commissions reduced.
PROMPT INVOICING
(3) Are the customers being invoiced promptly? Does a department CALL nicely to the customer to confirm that they have received the invoice and if they have any questions on the billing? This establishes a relationship with the payables department and can save later frustration. These communications (as well as all others with the customer) should be logged so that the salesperson knows who has spoken with the customer.
FOLLOW UP CALLS
(4) After payment has been received, CALL the Accounts Payable department thanking them for their remittance.
EMAILING
(5) If e-mail is to be used, the salesperson should always be cc'd on such communications, however, a phone call is more preferable as the personal relationship is established and the Company will more than likely receive payment faster.
The above may or may not be practical with you particular situation, however, when dealing with collections, you need to re-evaluate the entire sales process.
Best,
Bennet
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Bennet,
Those are great. I was in internal audit years ago and a subsidiary told us that when they switched to deferring commissions until cash collection, they turned over many sales people who's customers were poor payers. They went on to tell me the replacement salespeople were much higher quality and more profitable for the business.
I had success using the following approach in a company where we had a large staff of collectors that worked geographic regions. Characteristics of payment patterns varied by region due to factors not attributable to the collector's behavior (i.e. collection cycles were slower in Southern Europe and Latin America than in other regions, always had been and likely always will be) so we set individualized monthly quotas for the collectors that recognized these differences and where reaching the quota led to cash incentives. As an individual collector demonstrated the ability to consistently meat/beat his/her quota, the quota was moved up - but by reasonable and attainable increments so as to not provide a disincentive for good performance. Conversely, if a collector demonstrated difficulty in meeting quota on a regular basis, collections
We set aside in the budget $5k, and measured the % of AR over 180 days. If the % was under x amount, the 5K was split between the billing group as management dictated. You can set the number of days, % according to your business.
The responses have been great! I take both individuals and teams out to lunch (at mid-tier price points so it's more special), give them gift cards to some popular stores (especially to the ones they like) - in addition to any cash bonus, and sometimes award 2-3 night trips to one of several options (picking the hotels/cities with the best online discounts at that time).
PS - We also run big payout contests for Collector of Quarter/Year that also include lunch with company execs at an upscale restaurant.
I have noticed deliberate ploy by sales team members and credit collection staffs to deliberately allow bills to fall within the incentive duration zone at the expense of the company. I thus have an issue in giving incentives to credit and collection staffs based on cash collected outside a duration window.
Good afternoon. I'm thankful that there are forums like this. Would it be practical to reward my team for the collections that they have made for accounts that are > one year?, say percentage of the total collected? Should it be equally applied across all collectors or pro rata? Thanks.
