Page 172 - Accounting Best Practices

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8–8 Only Pay Commissions from Cash Received
receive only a very small proportion of their pay in the form of commissions. In
this situation, it makes little sense to calculate a commission for a very small
amount of money and is better to only do it at a longer interval, perhaps quarterly
or annually. Though it can be used only in a few cases, this best practice is worth
considering.
Cost: Installation time:

8–8 ONLY PAY COMMISSIONS 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 best practice that avoids this difficulty is to change the commission sys-
tem 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 to find another organization with a more favor-
able commission arrangement. Accordingly, the sales manager may not support a
change to this kind of commission structure.
A problem directly related to the accounting systems (and not the intransi-
gence of the sales department!) is that since commissions are now paid based on
cash received, there must be a cash report to show the amounts of cash received
from each customer in a given time period, in order to calculate commissions from
this information. Alternatively, if commissions are based on cash received from
specific invoices, the report must reflect this information. Most accounting systems
already contain this report; if not, it must be programmed into the system.
Cost: Installation time: