Collection Agencies And Deductions And Charge Backs

Deductions can create a mountain of extra work for vendors. Hiring a collection agency to help your business sort through everything can save a lot of time and effort

In many companies, the department charged with the enormous task of investigating and resolving deductions and invoice disputes is the credit department. What companies often fail to recognize is that deductions are not just an annoying distraction to business as usual. In fact, deductions, when tracked and analyzed can provide a company with many opportunities for improved efficiencies in its operations as well as its customer relations. The truth is that when the time is taken to explore and analyze deductions, patterns can emerge. Sometimes, it will become apparent that certain customers are simply trying to work the vendor compliance profit center. Other times, it will become clear that there is a deficiency within the company’s internal processes. If improvements can be made in a cost-effective way, this can have a very positive effect on profitability as well as customer relations.

When the credit department’s analysis of deductions identifies problem customers, this may be a good time to hire a collection agency. Collection agencies are experts in dealing with companies who are sitting on invoices or purposely slowing payments. Collection agencies know what laws apply in commercial debt collections, and they know a myriad of strategies to encourage debtors to pay. They are also experts in researching and understanding what is really going on with a debtor. They have seen it all, and they recognize many red flags that a typical credit department debt collector might not see.

Deductions can be an expensive drain on companies. Therefore, it is important to develop a process to deal with them. The basic objectives of any company dealing with deductions are:

1. Where possible, determine what areas within the company are contributing to the deductions problem and make adjustments to eliminate poor decisions or improve processes.
2. When deductions come into the company, collect the necessary data and information and send it to the customer promptly so that any dispute can be resolved.
3. Collect on deductions that were taken in error as soon as possible after the dispute is resolved.
4. When a deduction is determined to be justified, get it off the books quickly so that no further resources are wasted.

Although tedious, sorting through billing records to find where most deductions come from is vital to reducing the number of deductions filed by customers.

The first step a company should take when looking at its deductions problem is to identify exactly where the problem is. If your company tracks its deductions manually, this means pulling a lot of data and then tabulating these data. By tabulating the deductions data by check (dollar amount), customer and type of deduction, you can begin to really understand what is driving the problem. Calculation of the total dollar amount of deductions will show you the magnitude of the problem. Determine the percentage of deductions relative to total sales. This percentage can then be compared to the industry average to tell you if the problem is bigger than it should be. We will look more at industry comparisons later. By looking at which customers are contributing the most to the total deductions taken, you may be able to identify problem customers. Finally, by quantifying the different types of deductions being taken, this may point out deficiencies within your company’s operations and procedures. All of this information is critical to getting a handle on deductions. If your company tracks its deductions on the computer, these same analyses must be done; however, it will be quite a bit easier and less time consuming.

Further analysis is the next step. Look at the “problem” customers and for each customer focus in on the dollar amount of the deductions and the number of deductions. Do the same thing for each type of deduction. Calculate the dollar amount and the number of each deduction type. Next, look at problem customers and each deduction type and calculate the dollar amount and frequency by month and by year for the current year and the prior year. Compare the deductions as a percent of sales for the company and then compare this percent to the deductions as a percent of sales for each customer. Then compare these percentages in the current year to the same percentages calculated for the prior year. These data will enable you to identify negative deductions trends and help you prioritize problem customers as well as problem deductions areas.

When your problem customers have been identified, it may be time to consider hiring a collection agency. Collection agencies are very well-suited to negotiating with customers of all sizes and they are very familiar with deductions. Because the collection agency does not have to maintain a positive relationship with the customer, there is more room for negotiation than is the case if the vendor takes on the debt collection role. In addition, the collection agency’s objective 3rd party role can be helpful because the emotion is removed from the situation. Sometimes the agency can also be helpful in renegotiating future vendor compliance terms. Obviously, each customer is unique and has special requirements, and the collection agency can be an effective go-between in this context.

Once you have determined what is happening within your company relative to deductions, it is now time to compare these findings against what is going on in your industry. Deductions are a hot button these days for retailers and vendors alike. Therefore, there is likely to be a lot of data out there relating to deductions. Utilize this information to give you even greater insight into the deductions problems your company is facing. If you find out that everyone in your industry is facing the same scenario as your company, this can at least make you more comfortable that the workings within your organization are not badly askew. This is not to say that improvements can not be made. However, it may take away some of the anxiety surrounding the problem.

Once you have thoroughly analyzed the situation within your company and as it compares to the industry, the next step is to identify action steps to work towards reducing or even eliminating certain types of deductions. Remember, you will never be able to completely eliminate deductions. Deductions are here to stay because retailers have been able to reduce their staffing levels by making it the vendor’s responsibility to prove or disprove the validity of deductions taken.

If you keep all of your records manually, be sure to set up a well-organized filing cabinet or similar system of organization for records pertaining to deductions.

Whether you generate your reports manually or automatically, these data are invaluable. Without this information, your company has no hope of minimizing or eliminating deductions. The time spent to develop the tracking systems and reports is time well spent.

A key to generation of meaningful, accurate deductions tracking reports lies with the quality and consistency of the assignment of the codes. This is a training issue, and requires the credit department to train all employees who assign the deductions codes when customer remittances are received. Most large retailers today are very good at identifying the deductions they are taking on their remittance check. Retailers also track deductions so they will likely have a standard set of deductions codes that they use. When the credit department sets up a new customer file, this should be one element that is put into the file. It also might be a good idea to develop a central notebook within the credit department which contains each customer’s deductions codes. This way, when a remittance comes in, the person inputting the data into the system (or into the manual tracking system) can apply the correct internal deductions code which matches the customer’s deduction type.

One final area can be helpful when tracking deductions and looking for patterns: deduction notes. Customers may add notes to the remittance information explaining deductions. The credit department may add deduction notes when inputting remittance data into the computer. These notes can be sent to the customer when backup information relating to the deduction is needed or they can be routed to departments within the company for validation. In the case where the deduction is proved valid, the deduction notes can be attached to the credit memo used to clear the deduction.

All of the data generated by deductions can be collected and analyzed providing the company or credit department with invaluable information. If a goal of your company or the credit department is to minimize or eliminate deductions, it is essential to set up the systems to collect and process these data. In this case, information is definitely powerful.

Collection Agencies can help vendors negotiate with their customers
Putting together a task force to address deductions can be a powerful tool for vendors to reduce these deductions, and collection agencies can be very helpful for negotiating with customers

A Collection agency may be able to help you with customers who are abusing their use of deductions. Nowadays, deductions plague many companies, and are such an overwhelming issue that paralysis can set in. Aside from tracking and understanding the deductions issue, and taking action after they have already occurred, a more proactive approach to prevent deductions from happening can be very beneficial. This is the fourth article in a five part series about customer deductions, and it will focus on prevention of deductions.So you have already analyzed your deductions problem, and you’ve identified the types
that are out of control as well as the customers who are for whatever reason using too
many deductions. The next step is to figure out what is causing the deductions problems that you have. Pricing deductions usually happen because the amount your customer thinks he should be paying differs from the amount being charged on the invoice. Clearly, this is a red flag, and the reason for the discrepancy must be determined. Sometimes the discrepancy may be due to the customer having incorrect pricing information in his system. This is a simple problem to solve because the customer’s Vendor Profile likely contains all the information about you, the vendor. At large retailers, the vendor profile contains a wealth of information about you: pricing, packaging specifications, weights, shipment methods, all terms related to the sale, etc. If the customer’s pricing assumptions don’t match yours, this becomes either a training issue of your salesperson if he or she is not quoting the correct prices at the time of the sale or of the customer if the pricing in the profile is simply incorrect. It may also signal it is time for renegotiation of pricing, terms, etc. No matter the reason, it is best to go over the vendor profile with the customer in person.

Aside from pricing differences, deductions come in many shapes and sizes. Sometimes the most efficient way to tackle this complex problem is to create a task force within your company which is assigned the job of making personal customer visits to discuss and understand the deductions issues. The task force should be comprised of representatives from the credit, sales, distribution, customer service, and finance departments (the finance person should be involved with the electronic data interchange). The goal of this task force is to compare the customer’s vendor compliance components with the company’s normal procedures. If areas are identified where the company’s procedures are correct, but violate the customer’s compliance components, a waiver from the requirement needs to be negotiated. Negotiating for these waivers is the easiest way to prevent future deductions.

Once negotiations with customers are complete and your deductions policies and procedures have been established, your company should be in compliance as much is as possible with the vendor compliance components. This is when you should quickly begin to see a reduction in deductions. Of course, ongoing, a cost benefit analysis should be done to see if the time and money necessary to enforce the policies and procedures is in line with the amount saved by fewer deductions. You will never completely eliminate deductions; however, your company must determine what an acceptable level of deductions is and work towards this number.

A Collection agency can be helpful in negotiating with customers. When your task force has visited its customers and has identified the deductions that need to be negotiated, this may be a good time to hire a collection agency. Look for an agency that has experience negotiating deductions. Commercial collection agencies are often very experienced in this type of negotiation. Since they are experts in dealing with retailers and companies in general, they understand the relevant laws and they are armed with many tried and true negotiation strategies. Their debt collectors know how to talk with retailers. They understand the need for deductions, but they also know how to redefine deductions which have become vague and useful as a profit center for retailers. The fee structure of a commercial collection agency is usually a percentage of the amount collected and is contingent on successful debt collection, making it an attractive option for many vendors.

Deductions are not going away. They are a reality for any company selling to retailers. The more significant you are as a vendor, the more likely it is that you will be able to negotiate better vendor compliance components. Regardless of your size; however, the best way to discuss deductions with customers is through regular personal visits.

Photo by Mitmensch0812 (No real name given),
Setting up a digital system to keep track of deductions information will help streamline the process of identifying deduction-causing issues

Hiring a collection agency can be one strategy for reducing deductions. There are other strategies that can contribute positively to dealing with the problem of out of control deductions. This is the final article in a five part series about deductions and will discuss more strategies for getting a handle on this issue.

As we have noted in previous articles in this series, large retailers have vendor compliance requirements. Often these requirements cover a myriad of areas within the vendor’s company making the deductions problems a company-wide problem, not just a credit department problem. Because violations to the vendor compliance requirements can come from various parts of the company, it is paramount that every department affected by compliance requirements be aware of the requirement and if at all possible, be in compliance.

Within any company struggling with deductions problems, there is a definite need for cooperation across departments to ensure compliance. This internal cooperation means that top management must buy-in to the need for compliance and commitment to compliance. We all know that everything starts at the top. If management makes compliance a priority, then departments will make it a priority and cooperation among departments will become increasingly necessary.

Obviously, education is a key to compliance. The reason retailers have vendor compliance manuals is to facilitate this internal vendor education. Whichever department is the keeper of the compliance manuals for customers, should distribute the relevant compliance requirements to departments throughout the company. If the department is aware of the requirements, there is a greater likelihood of successful ongoing compliance. This education falls into the category of deductions prevention. The company is trying to comply so that no deductions will be necessary for that requirement.

Once departments within your company have been properly educated about the compliance requirements, another area which can cause noncompliance is inefficient internal operations. This area could be called controllable errors leading to deductions. Usually, these errors surface in environments which spend lots and lots of time trying to undo deductions after they happen. The key to reducing deductions is to find the underlying cause or problem and make changes to fix the problem or improve the process. Few successful settlements are negotiated on deductions after the fact.

Information is another key to getting a handle on deductions. To manage deductions, timely data is critical. It won’t matter much if you are looking at deductions information months after it happens. Central automation of deductions data is the way to go. Try to avoid each department hand keying data and publishing its own reports. When cash remittances come into the company, someone is already keying in data or it may be input directly at the time of the electronic data interchange. Try to keep the data input in one location, reducing duplication of effort and increased chance for data entry errors. Since it obvious that data needs vary from department to department, no reports should be designed until all internal customer needs have been defined. Try to design reports which can satisfy the information needs of multiple departments. Hopefully, by talking to the users of the data, it will become apparent that a few reports published regularly will provide a wealth of information and improved compliance.

With management buy-in, communication across departments, education of departments and improved information flow, the internal challenges associated with managing customer deductions can be significantly reduced. Deductions will always exist in the complex retail world of today. The key is to be in compliance as much as possible with the vendor requirements, and prevent deductions before they happen.

If certain customers are identified as abusers of deductions, hiring collection agencies may be helpful. A few commercial collection agencies are well-versed in negotiating settlements of all types. Their debt collectors are experts in accounts receivable collections, and therefore, have been exposed to many deductions negotiations. Their experience in dealing with retailers using deductions to reduce their payments gives them a distinct edge in successful debt collection from this type of debtor. With the complex nature of the deductions problem, help with problem customers and resultant accounts receivable collections can free up internal staff to look for other preventable deductions to capitalize on.

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