Receivable/Accounts - Information for Credit and Collection Issues

Tuesday, April 5, 2016

Revenue & Projections -- Part 1: The Basics

So we’ve just finished month-end, and odds are the subject on everyone’s mind in the third party collection world, and in a lot of minds in first party credit and collections would be whether they hit revenue targets for this past month, and what the projected revenues will be for this month we are now in.  Targets and goals are a big topic, and will take more than one blog article to address, so for the first part, let’s look at a few basic concepts and ideas on this topic, and then we can dive into specifics in later weeks.
For the most part, the collection world lives in a contingency environment, where commissions or fees are due on collected amounts – I’m going to speak to this specifically, but I certainly understand there might be flat fee environments, fees based on incremental legal work, or flat fees per full-time equivalent (FTE) staff member – most of what I’m saying here is certainly relevant to those sort of business engagements, with a bit of adjustment.
Goals, in my experience, are 70% math, and 30% educated guesswork making it a bit of an artform to setting and predicting what a collector may or may not achieve, and how you handle those goals is key to the operation of any credit or collection department or agency.
The Math and Artwork of Revenue Targets
So, many collectors out there have revenue goals, but how are they determined?  Does a collection manager make up a number and then exhort their team to reach it?  Well, sometimes ... but there really ought to be some math behind it.
So, let’s take Sarah, a collector at a collection agency – she receives 300 utility accounts regularly each month from the agency’s client, with a consistently average balance of about $570.00, and regularly liquidates 20% on amounts listed.  The agency receives a 20% contingency fee on collections.  So, if all things remain equal month to month, her target should be:
300 x $570.00 x 20% x 20% = $6840
An agency manager projecting revenue would likely target the collector somewhere between $6500-7000 revenue or fees (because that’s what agencies would discuss and measure, rather than gross dollars collected for the client), and that might be a reasonable target.
Now, Sarah’s revenue target for the month might be adjusted based on post-dated cheques or pre-authorized payments she has already gathered, or a change in listing patterns by the creditor, or seasonality that could affect recoveries in industries where it matters, the experience of the collector, the quality of data or any other influential factors.  But if all things hold even, her revenue should be consistent month to month.
So, for argument’s sake, let’s there’s a variant -- say it’s the month of February where the way weekends fall it is only 19 working days rather than the usual 21-22 of other months – what does that do to Sarah’s revenue target?  That’s easy -- math says:
$6840 / 21 x 19 = $6188
But let’s look at a non-math effect on projections -- the utility company mentioned above might increases their assignments to 600 files a month, needing two collectors, and a new collector with no experience might be hired – what should their goals be?  If the manager isn’t pushing too hard, they might set the new collector’s first month goal at $2000 revenue, the second month at $3500, the third month at $5000, and so on.  And the agency might further adjust these goals based on the historic performance of the collector – if they outperform their goal the first month coming in at $2600 revenue vs. a $2000 target, the agency manager might advance the collector’s goal to $4000 the second month.   This is just one kind of example to show there are all sorts of factors that can be brought into consideration that might not readily involve a formula for factor.
Breaking The Target Down Into It’s Components
So, let’s say all things are equal, the collector has a $6500 revenue goal, and the month has 21 working days, so that can be broken down into a daily goal of $309.52.  If they wanted to dive deeper, it could be reverse engineered into a right party contact (RPC) goal , a payment in full or cure goal, or even an hourly target.  To reach a monthly target, there are incremental units of progress that can be set down.
With those increments, the work plan can be adjusted or reviewed if things go off the rails earlier than month-end, while there is still time to do something about it.  Patterns can be measured, so individual components of the work task might show that work needs to be done on tracing accounts, right party contacts might not be high enough, or conversion of right party contacts might be a little low.  Each day can be measured as a success, or a shortfall to be addressed.
The important part of setting a goal is sharing the incremental mileposts with the collectors, and motivate them to keep their eye on the big picture – one big payment or one broken arrangement doesn’t make or break a month’s revenue total.
What Targets Should and Shouldn’t Be
I personally believe that a monthly goal should be a barometer, not necessarily a motivational tool – so if a collector is ahead or behind of target, that’s just a natural part of the collection process – if a collector falls too far behind, remedial action can be taken, and if the collector is further ahead, they can take on additional tasks to manage or can take on supporting tasks to help flagging collectors.
Goals should be achievable, and based on some sort of rationale.  If a manager is setting a $10,000 goal where a collection desk can only achieve $8,000, what’s the point?  It will demoralize the collector over time.  Moreover, if a goal is directly tied to bonuses or commissions, it can intensify positive or negative reactions by your collection team.  If the goal is too low, it becomes meaningless and doesn’t remain a relevant measurement of progress.  So, it’s a delicate balancing act.
I’ve worked at agencies where goals were set so incredibly high that only 5-10% of the staff could reliably reach target – this caused jealousy, hoarding of files, staff turnover, a sense of elitism by the few collectors able to achieve their targets, and other negative effects.  If roughly between 30-60% of your team is reaching target, that’s far more reasonable, and even better, if you have a stepped mechanism for rewarding mileposts that collectors can achieve for exceeding a base target goal, then that continues to motivate your team even after targets are hit.
Something to consider, goals don’t just have to be individual measuring tools – they can also be team driven, liquidation driven, or overall company goals as well – you can set group goals to encourage teamwork and reward a group as a whole, so even struggling collectors might see a reward for their efforts.
The Effects of Being Ahead and Behind of Goal
Any spreadsheet can show positive or negative numbers, but it’s crucial for any manager to understand the motivational effects of goals and their measurement.  If you set a high goal for staff, and they consistently fail or receive negative reinforcement for ‘failure’, they will eventually seek employment elsewhere.  A big white board at the front of the room filled with red zeroes or shortfall numbers is draining to everyone who has to stare at it, day in and day out.  If a collector loses confidence due to missing goals, it will come across in their calls and reduce their effectiveness.  Negativity can be a toxic influence, carrying over to other employees, and harm the company in small, barely measurable ways that have massive cost.
If a company has an unspoken caste system in the culture of the collectors, meaning those who consistently hit target are treated differently than those who do not, you build rifts in your company, and tell your employees that some are valued more (and less) than others.  It’s not just in performance reviews, it’s in the daily struggle to collect and how we manage that struggle and the people on the front lines making the efforts to recover accounts.
That being said, there’s nothing like a team congratulating themselves for hitting a group goal three days before month-end, or sharing the growth and success of a company back to the collectors who make it possible.  The greatest thing is an individual collector can measure whether they have been successful, and similar measurements can be given for a team as a whole.
Targets and goals are an intrinsic part of our collection world, because our work can be measured empirically – that’s a great motivator, and when used properly, can focus a collector or team in a way that is not often seen in many other service-based industries.  I’ve had to manage goals
Next, we’ll tackle the advanced math of targets – collectors with mixed portfolios, stepped liquidation goals based on monthly assignments, competing agencies, factors that can affect revenue, and the ability to build a program and determine workflow and manpower. 
Until then, feel free to share some of your target-based stories if you’ve been a collector or a manager, and how you dealt with performance measurement (for better or worse).  I can be reached by email or phone below, or feel free to post a comment.
Thanks kindly,
Blair DeMarco-Wettlaufer
KINGSTON Data & Credit
Cambridge, Ontario