CHAPTER 5: CASH APPLICATION, DEDUCTIONS, AND DISPUTE MANAGEMENT
For example:
Terms: 2%10n30 Invoice date: March 31
Many customers are mailing the check on April 10, or sending the payment electronically later. AR expects the check in their hands on April 10. If the check was mailed on April 10, it may take three to five business days before the check is received. Or payment may be made electronically on April 10, which means AR gets the money one or two days past the due date. This is called taking advantage of float. Most AR policies will write this off, but customers will find the tolerance and adjust to it, and some customers will continue to “push” the terms to see what they can get away with. Other customers will calculate the 10 days from the day the product is received, or from the day they have a perfect 3-way match, rather than from the invoice date. So the payment deducting the 2% discount could be received anywhere from 10 to 90 days past the intended due date! Do not leave the discount dates to be determined by the customer. State on the invoice that the payment must be “received” by a specific date (print the date on the invoice!) in order to deduct the discount. This way there is no open interpretation of the due date to cause a disagreement.
Collecting the UED can be a very controversial conversation with the customer. The company policy needs to be clearly communicated, from the welcome letter to each invoice.
To gain attention on the UED issues, the cash application team should book the discount into one of two GL account numbers: (1) earned Discount, or (2) unearned Discount. This will highlight how large the issue is and how much it is costing the company. DAYS DEDUCTIONS OUTSTANDING (DDO) DDO is a useful measurement for how well a company is processing deductions; the lower the number, the better. DDO is calculated by dividing the dollar value of open deductions by the average value of deductions incurred over the last three months. For example, if an average of $1,000 in deductions is incurred each month, and the total open deductions at the end of January is $2,500, then you have 2.5 months, or 75 days of deductions open (DDO). Preventative Controls for Deductions The AR team should review reports on the types of deductions customers are making, how often the deduction results in a credit memo, and how often the error is happening. DDO will aid the AR team by giving it valuable information, such as understanding how long it is taking to clear deductions and how much of the AR balance is tied up in deductions. It is important to know how much of the AR balance is deductions so as not to overstate the AR asset on the financial statements, as well as to properly forecast cash. Process flows should be mapped out on what the current process is and where the process could be improved to eliminate errors from happening in the future. The goal should be to reduce the DDO.
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THE ACCOUNTS RECEIVABLE SPECIALIST CERTIFICATION PROGRAM E-TEXTBOOK
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