Cash payday quick

Some small companies find that compensating salespeople only after customers pay up helps cash flow and revenue.

When Robert Kramer worked as a real-estate agent, he learned he couldn't begin to savor a fat commission check until a deal was done. When he launched Brookdale Plastics, a Plymouth, Minn., custom-plastics manufacturer, it made perfect sense to Kramer not to compensate his salespeople until he had customers' cash in hand.

"I figured if I could do it in real estate, my salespeople could do this, too," says Kramer, owner of the 31-employee, $4.5 million firm. "We've got all this [financial] exposure in the firm in labor and materials, and we really don't derive any benefit until we're paid. So there's no reason to pay our salespeople until the customer pays up."

When--and how--to compensate salespeople is an age-old concern for businesses large and small. Many companies pay their sales staffs as sales are "booked" (registered into the company's order-entry system) or invoiced, or upon shipment of goods or delivery of services.

Others tie salespeople's income to collected sales--a compensation method that offers several notable, and often. unexamined, advantages. Depending on how the compensation system is structured, paying salespeople upon collection of the payment due may offer some growing companies a way to improve cash flow.

The practice also can boost sales while encouraging salespeople to pay closer attention to customers' needs. Further, such a system discourages sales forces from obtaining hollow commitments from customers just to meet a sales or income target. (Stories abound about how salespeople working within a payment-upon-booking system inflated their sales productivity--and income--by attributing orders to dead people.)

"If you pay upon booking, sometimes the salesperson will put tremendous pressure on a customer to buy something he isn't ready to buy," says Larry Ramackers, a principal with Jay Alix & Associates, a Southfield, Mich., consulting firm specializing in turnaround management, or helping to resurrect companies in trouble. Ramackers also is a director of the Turnaround Management Association, based in Chicago.

"Maybe the customer didn't want to buy in March, but in April or May, so you may end up with an incomplete or canceled order," says Ramaekers. "Salespersons are sometimes more concerned about a customer signing an order than [about] whether the sale actually occurs."

While few reliable estimates are available on when companies pay their salespeople, a 1993 survey by the American Electronic Association of 183 firms--most of them association members--showed that payment upon collection was the least-prevalent compensation system practiced, with 14 percent using it. The system used most was paying salespeople upon invoicing (36 percent). That was followed by payment upon booking (28 percent) arid payment upon delivery (22 percent).

"The best possible arrangement for the company is for the salesperson's economic incentive to be tied directly to the company's," says Ramaekers. "The company shouldn't really care about orders or shipments, but about getting paid."

Theoretically, payment upon collection encourages salespeople to do a better job of examining a customer's credit worthiness because their income is contingent on the client paying up. And frequently, salespeople, not credit managers, are in a better position to determine credit quality because they're closer to customers.

Mark Swepston, president of Atlas Butler Heating and Cooling, in Columbus, Ohio, instituted payment upon collection four years ago when he revamped the company's sales-compensation system. Swepston was exploring ways to increase sales.

The six full-time salespeople are now on 100 percent commission, receiving 50 percent of a job's net income after a customer's payment is received. The salespeople are responsible for picking up checks from the company's primarily residential customers.

Swepston believes the new system has played a vital role in doubling his 75-employee firm's sales since 1991 to $8 million today. He says customer payments are received within 10 to 12 days of a residential job's completion, or about four times faster than when Atlas Butler paid salespeople upon booking. Additionally, the percentage of bad debts relative to sales has shrunk sharply, to 0.3 percent from 2.7 percent.

"It has changed our cash flow phenomenally," says Swepston.

Before instituting the payment-upon-collection system, Swepston tested it first with a salesperson who believed in the practice. It worked very well. The system not only improves Atlas Butler's bottom line but also enhances the sales staff's customer-service and other skills, Swepston says.

"It's made them pay more attention to customers' needs, because if the customer isn't satisfied, the salesperson won't get paid," he says. "They cared before, but this practice brings them one step closer to customers because their pocketbook is affected."

Adds Brookdale Plastics' Kramer: "It reaffirms in the minds of everybody here that it all boils down to the customer. We live and breathe for the customer to be No. 1. If the salespersons know they won't get paid if the customer isn't happy, they work hard to make sure the customer stays happy."

Instituting a payment-upon-collection system has diminished administrative and sales-force headaches for smaller companies such as Midwest Rubber Service & Supply Co., which serves Minnesota's Twin Cities area. The $10 million firm makes conveyor belts and rubber products.

Even at many companies that practice payment upon booking, invoicing, or shipping, salespeople must return all or some of their commission if the customer defaults on payment, says Ron Roberts, Midwest's controller. But tracking that can be administratively messy and can create bad blood with the sales staff.

With payment upon collection, there are no such administrative and salespersonnel worries, Roberts says.

He notes also that Midwest has gained another benefit from payment upon collection. Its salespeople, who become adept in assessing the credit worthiness of customers, are more entrepreneurial-minded, team-oriented, and empathetic to management's concerns.

"In that sense," adds Tom Ingram, chairman of the marketing-education department at Colorado State University, "salespersons become more like managers, and that's favorable because they represent the talent pool that will be looked at for future sales managers."

Many salespeople assume that payment upon collection means they will double as bill collectors, since they have more at stake if customers are delinquent. And indeed that is the case at Atlas Butler, where salespeople are thoroughly trained in collection responsibilities.

Since Atlas Butler revamped its salescompensation system, its salespeople have been spending more time discussing their role and the sales process with customers, helping them understand the installation/service workers' jobs and billing processing. A salesperson stopping by for payment uses that visit as a final customer-service opportunity, inquiring whether the customer is satisfied with the job.

But most companies practicing payment upon collection don't require their salespeople to do collection work, says James F. Carey, a Burlingame, Calif., compensation specialist and author of Complete Guide to Sales Force Compensation.

Carey maintains it's an inefficient use of time to have a $60,000-a-year salesperson, for example, perform the duties of a $30,000 collections person. Salespeople should concentrate on selling, he says, because that's what they're trained to do and how they get satisfaction from their work.

Says Kramer: "I don't want our salespersons to think of themselves as bill collectors, and I don't want customers thinking of our salespersons as bill collectors. The job of salespeople is to get the sales and create a positive relationship with the customer. Their relationship with customers is fragile enough without the salesperson going in one day and asking for business and the next day essentially scolding customers and asking why they haven't paid."

Beyond the negative baggage that bill-collecting salespeople might bring, many aren't trained to handle collection duties, says Colorado State University's Ingram. He favors a more-depersonalized collection approach using the accounts-receivable department.

Many salespeople might view collection work as demeaning and would resist that role, Ingram says. Further complicating matters, he notes, is the fact that salespeople typically have established relationships with customers' purchasing managers, not their accounts-payable officers.