CHAPTER 5: CASH APPLICATION, DEDUCTIONS, AND DISPUTE MANAGEMENT
This information is also valuable in determining if some of the AR policies should be updated based on the cost of resolving discrepancies, and how many times the customer was correct. Two areas which could be changed might be the write-off amount and the discrepancy tolerance amount. It is also important to track whether the whole invoice is open awaiting resolution, or if the invoice was partially paid with deductions. These require very different strategies and a different process approach and skill set to resolve these two different situations. Statistics reflect that invoices are 99- plus percent collectible, while deductions are typically 5-10 percent collectible. Metrics are needed, as they will confirm what is happening in your organization. If the customer is often right, points to an inefficient internal process. The AR team should analyze what causes these deductions to find the root cause and implement solutions to eliminate them. Deductions represent unhappy customers and are costly. Solving the problems discovered through analysis can involve longer-term invoice accuracy improvement projects driven by Six Sigma or other process improvement methods. These can deliver substantial benefits in productivity, reduced revenue dilution, and customer satisfaction. For instance, imagine a candy company that ships their product during the winter months in regular boxes. Customers begin deducting for damaged product. By reviewing the customers that are making the deductions, it is found that they are customers located in hot climates—and the candy is melting. By changing the container the product is shipped in and marking the boxes “Keep cool” in bold print, the product starts to arrive in perfect condition and the customers are happy and the deductions end. Here is another scenario: Customers are deducting for incorrect pricing. Investigation reveals that the customers are ordering from old catalogs. Mapping the process of paper catalogs and ensuring that price increases are properly communicated has become a daunting task. The customer is frustrated—how are they to know there has been a price increase? Therefore, the collections process is difficult. Many companies have resolved this by placing their catalogs and ordering online, which eliminates “old price” errors completely. There are many automation solutions that can easily eliminate these discrepancies. Automating reduces errors and cost. If you don’t have enough volume to cost-justify automation, outsourcing may be a solution. There are many resources to help improve processes. Attending AR conferences that offer training and the ability to benchmark with other companies, and to see what kinds of solutions are available, can prove very beneficial. STOPPING DDO BEFORE IT HAPPENS Although it may seem obvious, it bears repeating: try to catch mistakes before they happen. Study the issues end-to-end in order to prevent errors and fraud in advance, rather than applying a detective approach that places audits along the process to catch errors after the fact—or worse, have the customer inform you via a deduction. Put systems in place that can receive information electronically, validate data as it is entered, and match data on the invoices against sales orders. Sell a quality product, ship it in a quality fashion, and bill it timely and accurately.
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THE ACCOUNTS RECEIVABLE SPECIALIST CERTIFICATION PROGRAM E-TEXTBOOK
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