Writing Off Deductions

According to a recent survey, the overwhelming majority of companies already have a policy in place under which small dollar "nuisance" deductions are written off by cash application - rather than being charged back. The reason that companies have such a policy in place is that in a cost/benefit analysis creditor companies are often far better of writing off small deductions than taking the time to research and resolve them.

There are a number of reasons why this is true, including:

• The fact that statistically more than half the time deductions are taken the customer is correct or partially correct

• The costs inherent in charging back a deduction which include:

  • The time taken by accounts payable to generate the chargeback

  • The cost to print the chargeback, and to match it with the customer's supporting documentation

  • The time and cost of requesting supporting documentation when it is not sent with the deduction

  • The cost of researching the deduction to determine if it must be repaid or should be credited

  • The cost to generate the credit and offset the chargeback against the credit, or

  • The time and cost to document the reason why the deduction should be repaid

  • The time and cost of following up with the customer to ensure that a deduction taken in error is scheduled for payment and is paid

  • The opportunity/cost of having a collector or a deduction specialist working to collect a relatively small amount when they could be working on higher dollar volume invoices or deductions

Other factors to consider when trying to decide if writing off deductions is appropriate include:

• The current backlog of outstanding deductions/chargebacks

• The time it currently takes before deductions can be addressed

• The credit department's current staffing level

• The amount of cooperation you receive from other departments in researching deductions to determine whether you

Once all of these factors have been evaluted, the credit manager should be able to make a recommendation to senior management relating to the question of whether writing off deductions can be justified. Of the companies that write off nuisance deductions, the median write off allowed is between $30 and $40. This dollar figure is not right for every company, but some dollar amount is right for most creditor companies.

© 2010 by Michael C. Dennis.  All Rights Reserved