CHAPTER 5: CASH APPLICATION, DEDUCTIONS, AND DISPUTE MANAGEMENT
5.5 Dispute Management
From the time goods and services are ordered and received by the customers, there is potential errors to occur. The location of the transactions—i.e., whether in the U.S. or a VAT country—affects how these errors are corrected. In the U.S., for instance, customers most likely will short pay the invoice, but in a VAT country, companies will hold the payment until the discrepancies are resolved and a new invoice is issued, because the invoice is also a tax document. In the U.S., not every payment will match up to an invoice. Customers sometimes “short pay” an invoice—they deduct some amount from the total due shown on the invoice. There are a number of reasons for taking deductions or short paying. The most common reasons are listed later in this chapter. In the U.S., when the cash application team identifies a deduction, they clear the invoice and post a debit memo to the customer’s account. The DM number will be the reference number, which might be the invoice number preceded by DM (for example, DM1234). A debit memo form with the corresponding DM number will be filled out referencing a payment number (i.e., check number, date, amount of the deduction, and the reason). This can either be an electronic form (preferably) or a paper form. This is then sent to the AR deduction staff member to resolve. Managing deductions can be expensive and the yield or payback is typically small. Customers turn out to be correct most of the time. So it is important to balance the time-consuming and daunting challenge of managing deductions with the trade-off in a way that fits your company’s overall strategy and preserves profitability. Some companies institute a small balance automatic write-off tolerance, which eliminates costly efforts to research and correct deductions that fall under a certain dollar level. This tolerance should: a. Be automatically processed—that is, the small balance deduction is automatically removed from the customer account and charged to the tolerance account in the general ledger; and b. Have a high enough value to remove a substantial number of deductions from the resolution workload. The decision regarding the value at which to set the automatic write-off depends on the cash recovery experience in pursuing invalid deductions. If the recovery percentage is low, then increasing the automatic write-off tolerance will result in only a small revenue loss while saving large amounts of labor. Example: One company increased its automatic write-off threshold by 700 percent. The value of automatic write-offs increased only 33 percent, and since they only recovered 0.4 percent of deductions, the revenue relinquished was minimal. On the other hand, the labor savings enabled them to reduce the deductions team by 50 percent. Clearly, the labor savings far outweighed the incremental lost revenue/profit. The amount deducted may be justified and accepted, or it may be disputed. However, the difference between what is invoiced and what is paid creates a headache for cash application professionals. Even if there is a good reason for a customer to reduce the amount due on the invoice, the AR professional is tasked with straightening out the discrepancy. This process means time, effort, and cost.
92
THE ACCOUNTS RECEIVABLE SPECIALIST CERTIFICATION PROGRAM E-TEXTBOOK
Made with FlippingBook - Online catalogs