A company's owner briefly explains the benefits and pitfalls of a bonus system for collecting old receivables.
Once accounts receivable get too old, they usually become uncollectible. But Julie Prafke, president and owner of Humanix, a $5.8-million temporary-personnel company based in Spokane, Wash., has come up with an unusual solution to that problem: she pays a bonus to a financial staffer for every old receivable that is collected.
"It makes financial sense for us," Prafke says. "Our collection clerk gets 10% of the invoiced amount, but a collection agency would have cost us 50%." The strategy has helped Humanix keep aged receivables (more than 60 days outstanding) down around $20,000, compared with total receivables worth about $900,000. Better still, says the owner, "we haven't had to write off as much as $200 worth of bad debts this year."
Prafke concedes that there's a risk to the strategy: when you pay a bounty on old receivables, staffers may perceive it as a disincentive to collect all invoices as quickly as possible. "You have to really trust the person you're giving a bonus to," she says. "I certainly would never recommend starting a plan like this with someone whose job performance and ethical standards you weren't confident about."
Prafke introduced the bonus plan only after her receivables clerk, a woman with more than 20 years' experience, had been with Humanix for more than a year. The owner also regularly monitors the company's receivables-aging schedule, which would tip her off if bonuses were to start encouraging older rather than younger receivables.
Although collection bonuses have sometimes cost Humanix as much as $400 or $500 monthly, Prafke says the results are well worth it. "Our clerk will work until 1 a.m. if that's what it takes. That's what keeps our collection cycle averaging around 28 days -- which our bankers love to see."