For many companies, deductions continue to be a serious problem that are costly, cause confusion, and impact customer relationships. Usually the reasons for deductions fall into one of the following categories:

1) Pricing errors between the invoice and the purchase order or contract;

2) Quantity errors between what has been shipped and what has been received;

3) Special handling costs such as bank fees, extended warehousing, repairs to damaged goods, and any other costs incurred outside of what was perceived to be initially agreed upon between the creditor and customer.

In addition, credit and accounting managers are often on the frontlines of trying to resolve payment shortfalls, which often show up on aging reports affecting DSO and other credit and collection standards.

Whatever the reason, deductions impact a company in the following ways:

  • Without question, deductions impact cash flow and revenues. This is especially true in the retail industry where profit margins are already slim to begin with and payment terms from major customers can be well over 60 days.
  • The time to investigate and resolve deductions is another expense that not only negates the additional income that may be recouped in resolving the problem but could actually exacerbate the loss when the deduction is not recouped.
  • Since some deductions are too small to invest time resolving them on an individual basis, many creditors will simply write them off as the cost of the transaction. However, as some companies experience thousands of billings that can produce numerous small deductions, this can end up becoming a huge amount of lost revenue.

In view of the cost and impact that deductions have on a company, here are some ways that will help minimize the number of unauthorized discounts.

  • Meet with the major customers who comprise a substantial portion of the deductions and try to ascertain the source of the problems that are resulting in the deductions being taken in the first place. By spending the time to understand and analyze your major customers’ internal receiving and payable processes, and then comparing that to your own contracting, billing, packaging, shipping, and associated operations, you will begin to understand where the gaps are that result in causing the deductions.
  • Develop a Returns Policy that is very clearly conveyed to your customers. Most sales discussions shy away from the idea that there will be merchandise that needs to be returned. However, the reality is that from time to time some product may get through that is substandard or not in line with what was ordered or shipped.
  • If possible, it would be highly beneficial to establish a Returns Management Team (RMT), which would include members from sales, warehousing, logistics, accounts receivable, and other associated departments. This team would implement the Returns Policy, improve the returns process, and maximize asset recovery. Establishing an RMT would also require investing in technology to support the smooth reversal of all transactions involved.
  • Consider outsourcing the role of the Returns Management Team. Some major transportation carriers such as UPS can actually act in the role of your RMT to carry out your returns policy and resolve the return issues. This can be a wonderful outsourcing convenience, especially for many small to mid-size companies which do not have the resources and budget to establish and operate their own RMT.
  • Establish a zero deductions goal. In order to achieve this, you will need to continue to clarify, categorize and analyze the reasons why products are either being returned or other reasons resulting in deductions being taken. As you isolate each issue causing the deduction, you will need to adjust your internal controls and operation to correct the problem and discuss the corrections with your customer as required.
  • Develop a detailed Return Asset Recovery Program stipulating how returns are to be processed (repackaged, donated to charity, repaired, resold in secondary markets, destroyed, returned to manufacturer, etc.). Salvaging returns at many levels can help to greatly defray the costs incurred in the original deduction.

Although customer deductions are a serious problem for many companies, with a highly proactive approach, their impact can be significantly minimized.

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This article has been edited by Steven Gan. 

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