Sales commissions are often a difficult thing to balance and manage for any startup company. The sales people want their commissions yesterday and the business is afraid if they do not pay the sales commissions immediately the sales people will stop working. However, a business needs to understand the process of generating revenue, entering deposits, reconciling books, calculating commissions, transferring funds if necessary, and finally paying the sales people their commission.
A business generates revenue from clients and looks to pay sales people a commission for bringing that business to the company. In a perfect world money would be paid by the customer and the sales commission would be immediately deposited into the sales person’s bank account. However, the reality of the situation is that money does not typically enter a company on a single day. Revenues typically trickle in over a 30 day period from clients. During this time the business is making deposits into their bank account, and recording those deposits in their books. After a sales cycle, typically 30 days, the books are reconciled with the bank statements to ensure the data was properly entered.
Reconciliation is a key process prior to paying commissions because a business does not want to pay commissions for revenue which was not received. Often clients forget to pay, a check is lost, a check bounces, clients leave, or a client defers beginning for a month or two. These types of instances lead sales people to become frustrated because they believe they are owed commission for a sale which they believe occurred, but in reality it did not. The only way to guarantee sales people are paid the proper commissions is to reconcile the books with the bank account and then calculate commissions based upon the revenue which was actually collected. After the books are reconciled, a calculation can be made to transfer money from the company’s bank account.
Transferring money can sometimes be as simple as writing a check to all parties involved out of the company bank account. However, for many businesses such as law firms or real estate brokers trust accounts are involved with the company’s management process. Trust accounts are bank accounts which hold money that legally belongs to someone else. Typically such accounts are used to hold funds which may be used in the future to pay money if and when it is earned. For law firms trust accounts represent the money which the firm is looking to bill against. Some firms pay bonuses similar to sales commissions to lawyers who generate revenue for the firm. For these firms and others using trust accounts the trust transfers are crucial because regulatory guidelines stipulate what money can be paid from certain accounts, to whom, and when money may be transferred. For businesses with trust accounts the need to reconcile prior to paying any sort of commission is vital to maintaining the integrity of the account.
All in all paying commissions is not as simple a process as many people think. Sales commissions are also difficult when one considers the timing of the cash flows. Many industries such as property and casualty insurance see commission turn around times up to 180 days. Some businesses opt to do semi-annual or quarterly payouts in order to be meticulous as well as capture potential float income from investing the money. Any business that pays commissions should set a goal for payout to sakes people based upon their unique revenue streams. However, remember to set expectations in the beginning because as the business grows the reconciliations take longer due to a larger number of transactions, and the sales people may or may not understand the increased delays.