By Dean Kaplan+
With more and more retailers using deductions as a way to maximize purchasing power, hiring collection agencies may be one way to help control this problem. The bigger the retailer, the more deductions are taken. If your customer base contains these mega companies, you may be wondering what to do to get a handle on these deductions. How do you know if the deductions are valid? Even smaller customers take deductions. Anytime the customer feels the vendor has not complied with a purchase order rule or has made a mistake, it is common for the customer to take a deduction and reduce the amount paid on the invoice. Often, the deductions are legitimate, but not always. How can a company identify and quantify its deductions problem? This is the subject of this second article in a series of five about deductions and charge backs.
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.
The next article in this five part series will deal with developing an ongoing tracking system for deductions. Click here if you would like to go to the next article Collection Agencies And Deductions And Charge Backs – 3 Of 5. Click here if you missed the first article Collection Agencies And Deductions And Charge Backs – 1 Of 5.
The Kaplan Group is a boutique collection agency specializing in large (over $10,000) debt collections due from businesses. Founded in 1991, the company has a stellar reputation (A+ rating with the Better Business Bureau) and is recognized as one of the leading collection agencies for results on large and complex matters.