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Deduction Management

Many companies believe that the worst thing that is likely to happen to them if the company takes an unauthorized or improper deduction is that at some point in the future the creditor will provide enough documentation that it will have no choice but to repay the deduction.(Of course, in the mean time the customer has received what amounts to an interest free loan from the seller). With this in mind, many companies have decided to give their accounts payable department limited authority to resolve deductions. In fact, in many companies only the buyer has the authority to approve repayment of a deduction.

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

  • Request a detailed written explanation of the problem from the customer, including supporting documentation
  • If the accounts payable department says that the buyer must approve the deduction for repayment, ask immediately 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 payment is received.
  • Recognize that statistically half the time or more the customer is correct in claiming the seller has made an error. An obvious way to reduce the number of deductions is to reduce the number of errors made by the seller. In order to address internal problems, the credit department must find and fix the root causes of such errors.
  • Do not allow customers to delay large payments pending 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.

Under no circumstances should an order with incorrect terms or conditions be entered. A verbal commitment on the part of the buyer to make changes to prices or terms and conditions is not sufficient. The seller must hold the order until a written amendment Any change made to a letter of credit after it is issued. is received from the customer. Why? The answer relates to contract law.

When an offer is 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.

Source: Michael Dennis, author of "Credit and Collection Handbook" available at the NACM Bookstore.
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