Entrepreneur magazine, February 1998
It's a $10 billion problem growing at a rate of 20 percent annually: corporate customers who take unauthorized deductions from their bills, creating a commercial collections headache that just keeps getting worse.
The situation began back in the 1970s, when retailers started taking deductions off current invoices rather than waiting for rebates or credits. Today, customers routinely deduct not only legitimate discounts, rebates and credits but also penalties for service failures and a variety of unauthorized and sometimes even fraudulent deductions. "That can take a big bite out of your bottom line," says R. Clive McInnes, vice president of CHI/COR Information Management Inc., a Chicago-based computer software company that specializes in financial management systems.
How can you protect your company from losses? First, says McInnes, make sure everybody knows and plays by the same rules. For example, salespeople must make realistic promises and then communicate with other departments so promises can be kept.
Second, never ship an order without a signed purchase order that clearly states the terms and amount of the sale. As simple as that sounds, McInnes says, "You'd be amazed at the number of companies that don't do it." He adds that whatever is on the purchase order is what the customer will pay--regardless of what you invoice or what the price should be. So get a signed purchase order and be sure you can live with its terms.
Third, respond quickly to deductions. Don't let them pile up or slip through the cracks. When a customer takes a deduction, take immediate steps to determine its validity and, if appropriate, initiate collection action.
Fourth, says McInnes, involve your salespeople in resolving deductions. Keep in mind that "resolving" doesn't always mean collecting; it means identifying the reason for the deduction and deciding whether it is legitimate. It's not unusual for a salesperson to have caused the deduction in the first place--perhaps with a commitment that was not passed along to accounting--so get them to help out in this area. McInnes says some companies even reduce sales commissions by the amount of unresolved deductions.
Finally, perform as your customers expect. Many deductions are actually penalties because you failed to meet the terms of the purchase order or the customer's procedure requirements. For example, most of the major retailers and manufacturers have written guidelines for doing business with them and charge penalties in the form of invoice deductions when you do not meet those guidelines. They may, for example, demand that items be packaged a certain way and will take a deduction if you deviate. If you accidentally ship an incorrect item, you will not only have to replace it, but you may also be charged a handling fee. Or the company may deduct a service charge if you make a billing error, such as failing to include a promotional allowance or discount.
"Deductions and penalties are your customers telling you you're doing a bad job," says McInnes. If you're consistently missing deadlines, labeling products incorrectly or billing the wrong amounts, you need to take a look at your internal systems and develop a strategy to improve your performance--that should solve a significant portion of your deduction problems.
CHI/COR Information Management Inc., (800) 448-8777, firstname.lastname@example.org
Jacquelyn Lynn is a business writer in Winter Park, Florida.