Deduction Management; Deduction Write Off; The Deduction Management Process

For many creditor companies, customer deductions are a serious and growing problem.  Customer deductions can have a dramatic impact on a creditor company's cash flow.  Many companies need to re-think the way they manage customer deductions.  More specifically, credit professionals need processes and procedures in place that (a) limit the number of errors their company makes that result in deductions being taken by its customers, and (b) formalize the process by which deductions are addressed and resolved.

Many customers believe that the worst thing that is likely to happen if they take an unauthorized deduction is that the creditor will eventually provide documentation proving that the deduction must be repaid. In the mean time that customer has use of an interest free loan from the seller.  Many companies have given their accounts receivable department limited authority to repay deductions meaning that all such approvals must come from other departments such as purchasing or receiving.  

Collectors can accelerate the process of collecting on deductions taken in error by using the following techniques and by using some in combination with others:

• Request a detailed written explanation of the problem from the customer, including supporting documentation as soon as a deduction is taken
• If the accounts payable department says that the buyer must approve repayment, immediately ask to speak to the buyer
• Provide the buyer with all relevant documentation, and ask for immediate approval for repayment
• Follow up regularly (as you would with any other unpaid balance) until the decision maker approves repayment
• Recognize that statistically more than 50% of the time a customer is correct when they take a deduction.  Therefore, the most effective way to reduce the number of deductions is to reduce the number of errors your company makes
• In order to reduce the number of deductions taken, the credit department must find and fix the root causes of internal errors such as pricing errors, picking errors, or packing errors
• Do not allow customers to delay large payments pending your issuance of small credits. Customers should be told that the creditor does not expect the disputed portion to be paid, but does expect and need immediate payment on balance due that is not in dispute. 

Deduction Management and Contract Law:  The credit manager must make certain the sales department or the order entry department reviews the terms and conditions on the front and back of each purchase order they receive to make certain that the terms and conditions are acceptable to the seller. If, for example, a customer's purchase order states the buyer is to receive a 4% cash discount but the creditor only offers a 1% discount, the seller should not enter purchase order until an amended P.O. is received from the customer. Questions about what terms are acceptable and which are not should be referred to the credit manager.

Generally, a Purchase Order with incorrect pricing or payment tersm should be be released against a verbal commitment by the buyer to make changes to prices or terms and conditions is usually not sufficient. The seller creditor usually holds a pending order with pricing or payment terms problems until a written amendment is received. Why? The answer relates to contract law.

When an offer made by a customer to purchase goods at a certain price and subject to certain terms and conditions is accepted by the seller without comment, and assuming the seller ships the merchandise ordered, the presumption is that the seller has accepted the buyer's offer which includes all of the terms and conditions included on the purchase order - including any incorrect terms. The only way to be sure that an error on a PO is corrected is to reject the customer's purchase order. The seller must insist the buyer's offer be amended in writing. That amendment should be in the form of a new purchase order.

Tip:  Many creditor companies write off small dollar deductions.  Why?  Because they recognize using a cost/benefit analysis that the cost of researching and crediting or researching and pursuing repayment of a small dollar deduction taken in error is often far more than the amount of the deduction.  Each company must establish their own dollar threshold, but as a rule of thumb any deduction under $25 is a strong candidate for a miscellaneous write off.
 

Often, it Why, because it is not be cost effective to charge back a small amount – especially when one considers these costs:

(a) The cost of generating the debit,

(b) The cost of printing the debit memo,

(c) The cost of mailing the debit memo  (d) the cost of following up to collect against the unearned discount.

© 2011 by  Michael C. Dennis.  All Rights Reserved.  Mr. Dennis is a business consultant and the author of "Credit and Collection Handbook."